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Monday, September 27, 2021

Funding a 401(k) Vs. IRA: Which is More Preferable?

Choosing the right strategy for retirement savings is a challenge. Jamie Hopkins, the Director of Retirement Research at Carson Wealth, provides a clear cut comparison of the two most popular saving options: individual retirement account (IRA) and 401(k) profit sharing plan.

Since 401(k) is employer-sponsored it provides many advantages, such as, the ability to purchase employer securities inside the plan, after-tax contributions, etc. Moreover, most plans today go through automatic enrollment, which means you’ll be enrolled into a 401(k) plan of your company as soon as you join it for some deferral percent of your salary.

If you don’t have a 401(k) plan you can always consider an IRA for investment, but in order to save in it, you need to meet the income limits (they are usually below $122,000). Roth IRAs are for after-tax savings, so it’s always a good idea to diversify your portfolio by savings a bit in a Roth account, and even your 401(k) plan doesn’t provide a Roth account you can always set up an additional Roth IRA for that purpose.

Jamie Hopkins suggests saving in a 401(k) account enough first to reach the employer match, and only then saving into a Roth IRA. After the 401(k) is maxed out, one can consider saving in a traditional or Roth IRA.

IRA’s are also different from 401(k)s in terms of access to contributions, which makes it possible for any IRA holder to withdraw cash at any time, although early withdrawals may result in taxes and penalties.

The question of 401(k) or IRA is not an easy one to answer, and it definitely requires more reading and discussion with a financial advisor. To read the whole article please click on this link.


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