401K Vs. IRA? Find The Better Fit For You

Funding your future retirement is so important. When it comes to how you save, it’s vital that you choose the right outlet for saving that will benefit you and your future plans the most.


Two of the most popular options for retirement investment and savings are 401K and IRA.

But, how do you decide between the two? In this article, we’ll discuss the difference between 401k and IRA so that you can make a confident and informed decision about your financial retirement future.

What is an IRA?

An IRA, or individual retirement account, is a type of investment-based retirement account that you can hold individually and contribute to. You and your spouse can contribute portions of your income to your IRA accounts with different tax benefits according to the type you choose.

There are two main types of IRA savings accounts: a traditional IRA and Roth IRA. With a traditional IRA, you can contribute up to $6,000 per year ($7,000 if you’re over 50 years old). There are income taxes owed with this type of account, but you don’t pay them until you begin to withdraw funds in your retirement and they are tax deductible. You can make the same yearly contribution amounts with a Roth IRA, but the key difference is your contributions are not tax deductible and you can withdraw your money tax-free in retirement.

What is a 401k?

The key difference between a 401k and an IRA is that the 401k is offered through your employer, whereas the IRA is entirely personally funded by you. You’re able to contribute up to $19,000 per year to your 401k ($25,000 if you’re over 50 years old) and you do get a tax break on any money deposited into your account. Many employers will offer match programs also where they match the amount of money you contribute.

What are the Pros and Cons of an IRA?

When deciding on what type of retirement account to fund, it’s important to have a well-rounded view on both the positives and the negatives:

Pros

  • Contributions can reduce your amount of taxable income
  • Wide variety of investment options
  • Control over what type of plan you sign up for
  • Roth IRA offers tax-free withdrawals
  • Roth IRA contributions can be withdrawn at any time

Cons

  • Yearly contributions limited to $6,000 ($7,000 of 50 or older)
  • Distributions taxed as ordinary income
  • Higher incomes are limited in abilities to contribute
  • Minimum distributions are required at age 70 and 1/2

What are the Pros and Cons of a 401k?

Just as with IRA’s, 401ks have their own set of pros and cons:

Pros

  • Higher contribution limit of $19,000 per year ($25,000 for those 50 and older)
  • Option of employer contribution match
  • Contributions can lower taxable income
  • No income limitations

Cons

  • No say in how funds invested
  • Distributions are taxed as normal
  • Minimum distributions must start at age 70 and 1/2

Can you have both an IRA and a 401k?

Short answer, yes you can. However, you’ll want to plan out your funding in the right way. You should begin with trying to max out your 401k contributions if your employer has a matching program. Once you’ve maxed out your 401k, you should then contribute as much as possible to an IRA. If your employer doesn’t match funding in your 401k, you should focus on maxing out your IRA first, then redirect your attention to your 401k and max it out as much as possible. You do need to pay attention to the rules set on your IRA and 401k plan, however, to ensure you don’t exceed contribution or income maximums.

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