The answer is not simple. One needs to evaluate your personal situation, factoring in age, your tax bracket, years to retirement, and the product being considered.
Obviously, a 401(k) plan contribution is less attractive when employer matching is withdrawn. However, it still has two strong advantages: the convenience (and forced savings feature) of payroll deduction and the ability to invest before-tax dollars (i.e., money that has not yet been taxed) and exclude the contribution amount from taxable income. Plan contributions and earnings are tax-deferred until withdrawal at retirement.
Roth IRA contributions, on the other hand, are made with after-tax dollars (i.e., money that has already been taxed), and earnings come out tax-free at withdrawal if an account has been open at least five years and the owner is at least 59½. Although there is no immediate (year of contribution) tax benefit to Roth IRAs, the tax-free withdrawals can be beneficial to retirees.
Another advantage of Roth IRAs is a wider selection of investment options than what may be offered through an employer plan. However, certain income limits apply. In 2009, only singles with incomes under $105,000 and married couples with incomes under $166,000 can make a full Roth IRA contribution.
Assuming the income limit does not apply and a worker is eligible to contribute fully to a Roth IRA, a good way to decide the best investment option is to try several online calculators such as those at www.rothira.com or www.aarpfinancial.com. The calculators will incorporate personal variables such as age and marginal tax bracket.
It may be that you'll want to invest money for retirement in both places. The contribution limit for Roth IRAs in 2009 is $5,000 ($6,000 if age 50 and over). If you have more money than this to invest, you could invest remaining dollars in the unmatched 401(k), where the annual contribution limit is higher ($16,500 in 2009 and $22,000 if age 50 and over).
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