Clients often ask if it’s better to invest in an IRA or a 401(k). It’s a great question to ask, because it means that you’re actively engaging in planning for your ideal future.
At the end of the day, both accounts provide tax benefits while you’re saving for retirement, so neither is the wrong choice. Saving is always a good idea. But, you will no doubt get further if you create an intentional strategy. Your financial advisor can build a plan that meets your long-term retirement goals—but first, here’s what you should know.
IRA vs. 401(k): What’s the Difference?
The following are the main differences between an IRA and 401(k):
- An IRA is opened by you with the help of a bank or broker, whereas a 401(k) is opened by your employer as part of your employment benefits.
- The maximum contribution limit is much lower for an IRA ($6,000 for those under 50, $7,000 for those over 50), whereas it’s more than double for a 401(k) ($19,500 for those under 50, $26,000 for those over 50).
- An IRA offers a broader range of investment options, whereas a 401(k) is much more limited.
IRA vs. 401(k): How Do I Choose?
The decision between an IRA and a 401(k) isn’t cut and dry. It will depend on the stage in your career, how much you have to contribute, whether your employer offers matching, and various other factors. Each of these accounts has pros and cons, adding to the difficulty of choosing between the two.
Here are the primary factors to consider when choosing where to save your money:
- IRA: lower annual contribution limit and total control over a wide range of investments
- 401(k): higher annual contribution limit, less control over investments and rates, and possible employer matching benefit
IRA vs. 401(k): What About Using Both?
You can choose between an IRA and a 401(k), but you also have the option to contribute to both, maximizing your savings. The approach is usually determined by whether or not your employer matches your contributions.
If they do match your contributions, it’s wise to start with your 401(k) and contribute the amount your employer will match. For example, if they match 100% of your contributions on up to 3% of your salary, contribute 3% of your salary to your 401(k) to take advantage of that benefit.
If you’ve taken full advantage of your employer’s contribution, you can maximize your earnings by switching your efforts to an IRA. Finally, after you’ve maxed out your contribution limit, you will then switch back to saving in your 401(k). This strategy may sound complicated, but it will help you save the largest possible amount per year.
On the other hand, what if your employer does not offer 401(k) matching?
If you don’t have a matching benefit, it’s wise to start with an IRA—until you max out your contribution limit, of course, after which time you would turn to your 401(k). This strategy will allow you to start with more investment options. Your financial advisor can help you determine which selection of investments align best with your goals.
Reach Out for Help
As we said, neither an IRA or a 401(k) is a poor decision. Everyone’s goals are different, and each account has its benefits. Your financial advisor can take your entire financial standing into account before helping you devise a plan that works for you.
Southwestern Investment Group’s family of advisors follow a holistic approach to financial advising. We empower you to choose the best option for your future based on a long-term financial strategy.
It’s never too early or too late to get serious about retirement savings. Contact us today to discuss your future.
