IRA vs 401K: Tough Choice?

Investing can be crucial for retirement, but what are the benefits and disadvantages of an IRA vs 401k? Which is a better investment and will protect your retirement money more securely? Sometimes this can seem like a tough choice, because the IRA and the 401k plan are considered workhorses that make retirement possible. The advantages and disadvantages of both plans need to be evaluated, to determine which meets your investment and retirement needs more. You can have both plans, but care should be taken to ensure that you get the maximum tax benefits and advantages by placing funds in these accounts in a specific order to maximize the benefits and minimize the disadvantages.

An IRA has a smaller limit for employee contributions, and the cap is normally six thousand dollars, while the maximum for a 401k plan can be up to ten thousand dollars. With an IRA, all employer contributions are vested one hundred percent at the time of the contribution, while with a 401k this may or may not be true. Safe Harbor 401k plans have one hundred percent vestment with employer contributions but most other types of 401k plans allow for a gradual vestment, which occurs at specified intervals. Some companies have contributions that are fully vested for five years or longer, with a percentage of the contributions being vested each year until the time period has passed. 410k plans allow an employer to use their own judgment on when the matching contributions should be fully vested. For many companies this is done to prevent a high workforce turnover, and it gives employees an incentive to stay with the company.

You can contribute to both a 401k plan and an IRA, if your have access to these accounts. The trick is to make contributions that give you the best advantages and the most savings for retirement. If you have a 401k through your employer, and they provide matching funds for the account, you should make the maximum contribution to this account first, to take advantage of the matching funds to the fullest. This is free money going into the account that can earn interest and grow. The normal contribution limits to a 401k account is fifteen thousand five hundred dollars, and if you are over fifty years old you can also make a catch-up contribution of five thousand dollars more each year. This allows you to maximize the matching contribution from your employer.

Once you have made the maximum contribution to the 401k plan that is eligible for matching funds, an IRA for the next five thousand dollars can have some benefits, if you are eligible for this plan. This is true whether it is a traditional IRA or a Roth IRA. Any amount after this five thousand dollars, or if you are not eligible for either IRA account, then you should max out your 401k plan before looking at other options. One advantage a Roth IRA has over other IRAs and 401k plans is that there are no requirements for minimum distributions when you are seventy and a half years old. These accounts are great if you want to hold on to these funds until you need them without having to take disbursements.

When you compare 401k plans with IRA plans, the 401k plan should be the first place your money goes if you work for an employer who makes matching contributions, up to the maximum matched amount, to take advantage of the extra income in your retirement account. Whatever you choose, an IRA or a 401k, make sure you invest your retirement money where it will do the most good and give you the most advantages. Most of the time this means starting with the employer matched 401k up to the maximum contribution limit, and then funding the IRA up to the contribution limit.

The information supplied in this article is not to be considered as medical advice and is for educational purposes only.