Should I Choose A 401K or IRA?

In the past, a pension or Social Security benefit was sufficient to cover retirement expenses. Today, it is not as easy. Instead, many people choose to fund their post-work years themselves with various retirement plans that provide tax breaks and other benefits.

Let's take a look at the different options and factors you should consider when choosing an investment account.


  • When it comes to taxes, Roth and traditional IRAs are different. Both can be withdrawn in retirement and contributed to.
  • You can only invest in one type or retirement account. Your money could grow faster in a 401k plan with employer match.
  • Consider how you can get the best match and tax treatment if you have more than one type retirement account.

Roth IRA vs. Traditional IRA

Individual retirement accounts, also known as IRAs, are tax-advantaged accounts which allow you to hold the investments of your choice. There are two types of IRAs available: Roth and traditional. To contribute to either, you must have earned income (wages, salaries, or the like).

The Internal Revenue Service sets the limits and tax benefits for IRAs. The contribution limits for traditional IRAs as well as Roth IRAs remain the same. You can contribute as much as $6,000 per year for 2021 or 2022. If you are 50 years old or older, you will be able to add $1,000.

You must take required minimal distributions (RMDs ) from a traditional IRA. These are annual withdrawals that are calculated. As of 2020, the Security Act passed by the U.S. Congress. This increased the age at which you must begin taking RMDs to 70 1/2 to 72.

The IRS has made some changes to the minimum distribution rules for beneficiaries designated beneficiaries in the event of death of an IRA owner on or after December 31, 2019. The funds must be distributed within the 10th anniversary of the death of an IRA owner. Some eligible beneficiaries are exempted, such as spouses.

Whether you're eligible for either type of IRA is up to you. It all depends on whether you want to pay taxes now or later.

Traditional IRA Income Limits

You get an upfront tax cut with a traditional IRA–you can deduct contributions but you have to pay taxes on withdrawals in retirement.

Roth IRA Income Limits

A Roth IRA allows you to make a contribution that is not tax deductible. However, qualified distributions are exempt from taxes and penalties. You must have contributed at least five years ago to a Roth IRA. One of the following must also be true:

  • You are now 59 1/2 years old.
  • You are disabled.
  • The distribution is used to purchase a home for the first time (lifetime limit: $10,000).
  • You have passed away (and your beneficiary will receive the distributions).

Roth IRAs allow for contributions that are not allowed in traditional IRAs. You can't contribute to Roth IRAs if your income is too high. These limits are determined by your modified adjusted Gross Income (MAGI) as well as your filing status.

Look at your current IRA account to help you choose which IRA to invest. Tax bracket Compare your retirement tax bracket to determine which plan will result in lower taxes and higher income.

A Roth is a better option if you anticipate being in a higher tax bracket when you retire or if your earnings are significant. You won't pay any taxes as long as you receive qualified distributions.

401(k), Plans

401(k), like IRAs are tax-advantaged accounts that can be used to save for retirement. They aren't set up by individuals, which is the “I” in IRA. Instead, they're offered to employers.

Notice that 401(k),s are defined contributions plans. Employers contribute to their 401ks via automatic payroll withholding. Employers can also add money through an employer match.

Your employer may contribute up to 5% of your monthly salary, provided that you contribute at least the same amount. Matches offered by your employer are free.

Limitations on 401(k), Contribution Limits

You can contribute $19,500 to your 2021 401(k), or $26,000 to your retirement plan if you are 50 years old or older, thanks to a $6,000. catch-up contribution. This increases to $20,000. Or $27,000 with the catch up contribution for 2022.

Employers are also eligible to contribute. Employers can also contribute. This increases to $61,000 or $67,000. 16

This is one of the advantages that 401(k)s have over traditional or Roth IRAs.

What if you can contribute to a 401k or an IRA?

You may be eligible to make both traditional IRA and Roth IRA contributions. You may not be able or able to make both.

It is up to you to decide which option is best for you. If you have the option to contribute to both a Roth401(k), or both, some of these concepts may also apply.

Let's take you, as an example, you're employed by Company A. You can make a salary transfer to Company A's plan's 401(k). You earn $50,000 annually and can contribute $2,000 per year. You have also decided to keep the money in one account to avoid paying excessive fees, but you have to decide if it is better to contribute to an IRA or a 401(k).

Matching companies is possible

The 401(k), if Company A offers a matching contributions to your salary-deferral contributions, will be the better option. Here is an example of the growth of your accounts over a period of 10 years, with an employer match of $1 per $1 when you contribute, this can be up to 3% of your salary.

You'll be eligible for a $1,500 matching contribution ($50,000 x 3.3%) and your 401(k) will receive a matching contribution of $1,500 ($50,000 x 3%) would grow much faster than an IRA over the next ten years

If there's no company that matches,

You would want to take the initiative to ask the following questions if Company A doesn't make matching contributions to its 401(k), plan. Before deciding whether or not to invest in the401(k).

Question #1 What investment options are available? Large corporations tend to limit investment options to mutual fund, bond and money-market instruments. Although smaller companies might do the same, they are more likely to allow self-directed investments.

Usually you can choose between stocks, bonds and mutual funds. This is similar to the investment options in a self directed IRA. You might be able to make more money if your investments in the 401k are restricted and you could also contribute to an IRA which would offer more investment options.

Question #2 What are the fees? Yes, fees are charged to 401k accounts. Many participants believe these fees are less visible than the fees charged to an IRA, that may not be the case, read the fine print and consult your financial consultant.

You'd want to compare the fees applicable to your company's 401k plan with the operational and trade-related charges that apply to an IRA.

Question #3 Is the 401(k), accessible? Although retirement savings are meant to be accumulated until retirement, circumstances sometimes occur that force participants to withdraw or borrow from retirement accounts, if this could be a potential circumstance, make sure you see what the penalties are before you withdrawal.

Technically, IRA assets may be withdrawn at anytime, although, there are usually fees to do this.

Question #4 How much does professional management cost? You may need to hire a professional investor advisor to ensure that your assets align with your retirement goals.

You will not be charged extra for professional management of his investments if your employer offers them as part its employee benefits package. This perk is not available to IRAs unless the employer extends these services to assets that aren't covered by its employer-sponsored plans.

These points are worth taking into consideration, even if you are making matching contributions to your 401(k), so you can surmise that even if there is no match, that an IRA offers more savings than a 401k.

What about tax deductions?

Contributions to a Roth IRA do not qualify for tax deduction on the deposit, but on the withdrawal you are usually not taxed which is why it's so appealing because you're paying into the Roth IRA in today's inflation and withdrawing at a later time in a higher inflationary period without penalties of taxes or fees.

What if you could contribute to a 401k and an IRA?

Let's now take a look funding both a 401k and a Roth IRA. You may not need to worry about how to allocate your savings if you're able to contribute to your entire account.

This is based on If you're able to save $7,000 per year.

Maximizing your match

Consider the maximum amount you can contribute to the plan to be eligible for the maximum matching contribution.

As an example, let's say you earn $80,000 annually. The match is $1 per $1 up to 3%. To receive $2,400 in matching contributions, you will need to contribute $2,400 at minimum to your 401k plan.

Choosing between IRAs

You'll have $4,600 left over if you put $2,400 in your 401(k), you'll also need to do the math or consult your tax advisor to determine how much of your traditional IRA contribution would be tax deductible . This will help you decide whether to go with a Roth IRA, traditional IRA, or a combination.

No matter what you do your contributions to both IRAs must not exceed the tax year limit.

Which one should I finance first?

Contributions to retirement accounts should be made early in the calendar year or every month. This will allow the assets to begin accumulating earnings quickly.

Also, consider how matching contributions are made. While some companies pay the entire amount in one lump sum, others make contributions throughout the year. If you are in this situation, it is better to make salary-deferral contributions to the Section 401(k), early in the year.

Additional Points to Be Considered

You should also consider the following factors in addition to those already mentioned:

Your Retirement

When determining the right asset allocation, it is important to consider your retirement plan and your age. Participating in a plan with a catch up contribution feature if you're over 50 can be a good option, especially if your goal is to build a retirement nest egg.

Participating in a 401k plan with a catch up feature can increase your nest egg's size each year. You can only add $1,000 to your contribution with catch-up features in IRAs.

The purpose of funding a retirement fund

Retirement accounts are typically used to fund your retirement years. However, some people intend to leave these accounts to their beneficiaries.

You need to consider whether you wish to leave tax-free assets for your beneficiaries and whether you prefer to avoid the risk of having to take RMDs to lower your account balance. Roth IRAs or Roth 401(k), allow you to pay taxes at the time you make your initial contributions. The RMD rules don't apply to Roth IRA owners, so a greater balance can be left to beneficiaries.

Certain government agencies offer special retirement programs for employees.

What are the best retirement plans?

Individual retirement accounts (IRAs) are the best option for individual retirement planning. They include Roth IRAs and traditional IRAs. These accounts can be opened by anyone who earns income. The best retirement plans offered by employers include 401(k), 403(b), and 457 (b).

What is the maximum amount I can contribute to my 401(k).

For 2021, the annual contribution limit to a retirement plan is $19 500. The contribution limit for 2022 is $20,500. You can contribute $6,500 more if you're 50 years old or older.

What is a good amount of money for retirement?

A variety of factors influence the amount of money you should have for retirement. These include your current lifestyle, retirement goals, obligations, and health. It is recommended that your annual retirement income be equal to 80% from your last job's income.

The Results Are

If you are eligible to fund multiple retirement accounts, and have the funds to do so, there is no problem to save for retirement in both types of accounts, but It can be difficult to choose the best option for those who don’t have enough money to fund multiple accounts.

It comes down to whether you prefer the tax benefits on the back end of Roth IRAs or the front end of traditional IRAs. It is important to consider the ultimate purpose of your account such as retirement or estate planning. These issues can be tackled by a competent retirement planning advisor who will help them make sensible decisions.


This is our disclosure:  This summary is for informational purposes only. This summary is not intended to be a recommendation for or give advice for any company or individual.

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Nicole Jolie

Nicole Jolie brings you updated information on retirement including where to travel, health, investment trends and planning.  Whether you're a GenX'er, Baby Boomer or about to retire this site is for you.


This is our disclosure:  This summary is for informational purposes only. This summary is not intended to be a recommendation for or give advice for any company or individual.

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