Should I invest in an IRA or 401(k)?

Whether retirement is on the horizon or decades in the future, don’t let the complicated numbers and acronyms scare you away. Saving for retirement is crucial, and getting your financial future in order could be easier than you think. So, what’s the big deal?

Imagine getting to the ripe old age of 70 and realizing at your retirement party you have nothing to fund your lawn bowling and bingo-filled days—even the government doesn’t want to see you in that situation. Putting money away into a traditional savings account is a good start, but there are retirement-specific options that can prove to be more valuable in the long run. Investing in an IRA or 401(k) provides an actionable route to financial freedom in your Golden Years, so consider the pros and cons of each below.

IRA vs. 401(k)s: The Basics

Both IRAs and 401(k)s are designed to help you plan for your financial future. When you put money into either, you won’t necessarily have to pay taxes on the contributions right away. Plus, they’re built for the long haul; you can keep contributing to IRA or 401k until you’re the ripe old age of 70 ½.

In both a regular 401(k) and IRA, contributions are tax-deferred, meaning you’re putting in contributions that you don’t have to pay taxes on annually. If you’re worried paying taxes later might mess with your budgeting, you can opt for a Roth IRA or 401(k) which takes out taxes immediately. To find which is right for you, try talking to a financial advisor.

There are a few key differences between an IRA and a 401(k). Anyone can contribute to an IRA but to contribute to a 401(k) you must be employed by a company. If your employer matches your 401(k) contributions, that added return on investment makes this option a no-brainer.

To clarify things further, we’ve laid out a handy list of pros and cons for each.

Pros of a 401(k)

  • Most employers will match your contributions to your 401(k) up to a certain percentage of your salary. You should contribute that percentage at least, because your employer is essentially giving you free money.
  • In addition to employer matching programs, a 401(k) has a higher contribution limit. You’re allowed to put up to $17,500 into it per year. Just think of how many games of golf you could play with that!

Pros of an IRA

  • Unlike a 401(k), anyone can contribute to an IRA. Just like an employee-sponsored 401(k) taxes are deferred on a regular IRA. If you opt for a Roth IRA, taxes will be taken out immediately so you don’t have to pay up later.
  • In addition, traditional IRAs offer tax-deductible contributions for individuals that don’t participate in another 401(k) plan.

Cons of a 401(k)

  • Unlike an IRA, a 401(k) is linked to a certain employer, meaning once you leave that job, you can no longer contribute to it. At that point, you can either turn it into an IRA or roll it over to your new employer’s 401(k) program.
  • 401(k)s aren’t immune to the pesky yet prevalent annual fee. These costs can vary from nothing to 2% on your contributions. If an IRA has any annual fee, it’s usually significantly less.
  • A lot of 401(k)s offer limited investment options, which means you have less control of how your money multiplies itself.

Cons of an IRA

  • Unfortunately, a traditional IRA has a significantly lower contribution cap than a 401(k). With an IRA your annual contributions are limited to $5,500 a year.
  • You’re also limited by a Roth IRA income cap. Your adjusted gross income must be under $133,000 annually, but if you’re married, your joint income must be less than $186,000.

Don’t be wary when it comes to retirement. Your investment options are plentiful, and offer a plethora of benefits. Both IRAs and 401(k)s are great ways to plan for your future—and both ensure your cash compounds over time.


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