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When you are driving down the road to retirement, it’s critical to choose the best vehicle. And for many savers, it may be time for an upgrade. Those who have made the savvy commitment to save at least 10% of their salary should consider the features and benefits of Roth IRAs and 401ks described here.

When it comes to retirement savings, too many people are stuck with their first vehicle. My first car was a white 1995 Ford Probe. It was a sporty-looking hatchback with roll-down windows and an engine only Fred Flintstone would envy. It got me to and from college, and it even got my brother and I across the country and barely home again. But after several years of service, it was time to shop for new options. Just because you’ve chosen to “drive” one retirement vehicle for a while doesn’t mean you have to finish the ride with it.

Your Other Options

If your employer offers a 401k match, it’s a great place to jump-start your savings. At the minimum, many employers match the first 3% of your savings. This is free money that you can’t afford to pass up. In 2013, you can defer up to $17,500 into a 401k or up to $23,000 if you are 50 or older.

A great strength of 401k plans is that they can easily automate your savings through payroll deductions. As with most long-term goals, the more simple your plan, the more likely you are to succeed.

Many 401k plans now offer a Roth 401k. If this is true for you, it may be the investment vehicle upgrade you need. The Roth 401k will allow you to pay taxes on your retirement savings contributions upfront and avoid future taxes. All withdrawals of Roth savings are free from federal income tax in retirement.

You are generally a good candidate for a Roth if you can answer yes to any of these variables:

  • You’re young and earning less than you will be in the future.
  • You’re a supersaver and will have a large nest egg in retirement.
  • After considering the U.S. government’s debts and deficits, you expect tax rates will rise in the future, and you are willing to pay now for tax-free income later on.

If your company does not offer a match or if you have already maxed out this option and want to save more, consider a Roth IRA. Roth IRAs provide more flexibility than a 401k because you can access the principal at any time without penalty. Unless you are willing and able to take a loan, 401k plans typically restrict distributions from the plan until retirement.

Some Road Bumps That May Necessitate Savings Adjustments

You are now eligible to save up to $5,500 in a Roth IRA or $6,500 if you are age 50 or older every year. Income phaseouts for Roths begin at $112,000 modified adjusted gross income (MAGI) for single filers and $178,000 MAGI for joint filers. If your income disqualifies you from making a direct Roth IRA contribution, consider a strategy that allows you to make a Roth IRA contribution through the back door.

You can lower your fees with a Roth IRA. Participants in a 401k plan are more likely to incur seven different fees, than those who invest in a Roth IRA. Adding this together, it’s not uncommon for 401k plans to have fees 1% higher than a Roth IRA invested with a low-cost broker like Charles Schwab.

Roth IRAs also offer beneficial provisions for first-time home purchases and college expenses. The point is that investors may prefer the Roth IRA for its flexibility and lower fee structure. In either case, both the Roth IRA and Roth 401k allow you to store this money where it will never be taxed again.

Before you focus on retirement savings, make sure you have funded an emergency reserve account. We all know people who have unexpectedly lost their jobs. I recommend you have three to six months of living expenses in a liquid account.

Following these steps and investing wisely will ensure that you are driving in style during your golden years.

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