This is an age-old question clients ask all the time. Let’s help settle this debate by explaining and comparing two of the most popular ways to save for retirement—the 401(k) plan and the IRA (Individual Retirement Account). 401(k) Retirement Plans
401k is a retirement plan for investment savings set up by employers for employees. Employees can make pre-tax or after-tax contributions to the account directly from their paycheck each pay period. The funds are invested, and the money is available upon retirement or special circumstances. Tax implications very depending on what type of 401k individual has and reasons for distributions.
IRAs
An IRA is a tax-advantaged account that holds money set aside by an individual for retirement from their earned income. It also can be set on pre-tax or after-tax basis. With an IRA, the individual is responsible for making investment choices in the account. Worth noting are two additional types of IRA plans which are designed for small business owners and the self-employed: the SEP-IRA and the SIMPLE IRA. 401(k) vs. IRA
So, how can you decide which option is more suitable for you? Let’s look at a quick comparison. - 401(k) plans are available through employers, whereas you can open an IRA yourself at a financial institution of your choice. This is especially the case for traditional and Roth IRA accounts. However, your employer can play a role in facilitating and even contributing to SIMPLE and SEP IRAs.
- 401(k)s can be a good investment for employees who have access to one, especially if the employer offers matching contributions.
- IRAs may be ideal for anyone who doesn’t have access to an employer-sponsored retirement account, or if they want greater flexibility than what’s offered in their 401(k). (But, an employer can also facilitate access to SIMPLE and SEP IRAs.)
- Workplace 401(k) plans typically require less involvement from the participant, but the investment options can be limited.
- With an IRA you have more flexibility in your investment options, but with that, some added responsibility to make your own investment decisions.
- An IRA can offer low to no administrative fees, while a 401(k) tends to have higher administration fees.
Call it a Draw: The Answer Could Be “Both”
Viewing 401(k) plans and IRAs in either/or terms could result in a missed opportunity. Many investors use IRAs to complement an employer-sponsored 401(k) plan. It might be appropriate for you to leverage the benefits of both to formulate a tax savvy, sustainable drawdown strategy for retirement. If you’re wondering which retirement investment plan is ideal for you, let’s set up a meeting to discuss your options. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera nor any of its representatives may give legal or tax advice. |
