IRA vs. 401(k): Which is the better option?

IRA vs. 401(k): Which is the better option?

We can all agree that saving for retirement is a must. The next question is where. Both an IRA and 401(k) can be excellent options for retirement savings. Both offer you tax-advantages, as you don't pay any taxes on the growth of your investments. Typically, costs associated with 401(k) management are higher than those of an IRA plan. However, with many new regulations in the financial industry today, participants are given protection from exorbitant fees. Within an IRA account your investment options can be almost never-ending but many times 401(k)'s limit your investment capabilities to a select offering or have restrictions on investment types. With 401(k)'s most employers offer an "employer match", usually ranging dollar for dollar anywhere from 2%-5% of your salary deferral (depending on the plan). If you elect to not participate you are essentially "leaving money on the table" and forgoing additional monies that are employment incentives – sort of like a raise. Here are the contribution maximums:

​Plan type
​IRA
​401k
​Basic contribution limit
​$5,500
​$17,500
​Catch-up contribution limit for those aged 50 and older
​$1,000

​$5,500

​Total contribution limit for those aged 50 and older
​$6,500

​$23,000

​Maximum combined contribution for employee and employer
​N/A

​$52,000

​Maximum combined contribution for employee and employer for those aged 50 and older
​​N/A
​$57,500

Source IRS

As you can see above, the contribution limitations for the IRA make the 401(k) an attractive choice. If you have the option of a 401(k) through your employer I would suggest you first take advantage of that. The good news however, is that you don't have to choose between them. If you have a 401(k) already you can also make additional (non-deductible) IRA or Roth IRA contributions to help you reach your retirement goals.

The differences between IRA vs 401k accounts are not that difficult to understand. Both are great tax-advantaged ways to save for retirement. Regularly contributing to either one is a great way to grow your investments for retirement. The more you contribute, the more your assets can compound over time. You should strongly consider maxing out your contributions, especially if they are eligible for an employer match.

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Friday, 23 August 2019