401K or IRA? Which is Best for You?

Open an IRA or join a 401k?

401K and IRA

One of the most important things you can do to secure your future is to plan now for your retirement. The younger you are when you start saving for your retirement years, the better off you’ll be. Even if you can contribute only a small amount each month, it will really add up over the years. Chances are that you’re already paying into Social Security, but trust me, you can’t survive from this monthly check alone! You'll need an IRA or a 401k.

Two of the most popular retirement plans in the United States are the 401k and the Individual Retirement Account, or IRA plans, for short. Most financial consultants recommend that their clients open an IRa of join a 401k - or both, if possible.

What’s a 410k plan?

A 410k is an investment plan that’s offered by many employers. You contribute a certain percentage of your paycheck, and generally speaking, your employer also contributes to your account. The amount the employer contributes varies from employer to employer, with some matching the amount you contribute, up to a certain percentage.

What’s an IRA?

An IRA is sometimes offered by employers, but most people set up their own IRA. They open an IRA and contribute to it regularly and have control over how the money is invested. If you open an IRA, you’ll be the one who decides where the money is invested and how much will be invested in each place. Your choices will be almost endless with an IRA.

Which is best – a 401k or an IRA?

First of all, you need to find out if your employer even offers a 410k. If he doesn’t, the question is moot. Otherwise, 401Ks and IRAs share several of the same characteristics. Both are meant to be used only after you retire. Both earn money (hopefully) from investments made with your contributions. Both charge tax penalties and fines for early withdrawals. Both investment plans also have annual limits of how much you can contribute, but that amount is higher with a 401k than with an IRA.

One big difference in the two investment plans is that with a 401k, your employer will add funds to the account. With an IRA, only you will be making contributions.

With an IRA, you’ll have a much larger choice of investments that you decide on. With a 401k, you won’t be making these choices. You might get to decide whether you want low-risk or high-risk investments, but that’s about it. If you don’t want the responsibility of choosing your own investments, you might prefer a 401k plan over an IRA.

Another big difference in a 401k and an IRA is that you’ll be able to borrow funds from your 401k, but not from an IRA.

The bottom line is, if your employer offers a 401k and matches your contributions, don’t turn that down. You can always open an IRA account on your own if your employer doesn’t provide a 401k investment plan.

Even if you have a 401k, you might still be able to contribute to an IRA, also. In this case, your IRA contributions might not be tax deductible, depending on your modified adjusted gross income and your filing status.

Warning!

Both 401Ks and IRAs are designed to be used after you retire – not before. If you withdraw funds early, you’ll be heavily penalized and heavily taxed.

Another point to consider is whether you’ll make contributions with before-tax dollars or with after-tax dollars. If you contribute money to either your 401k or to your IRA before the money has been taxed, you’ll have more money in your account, but you’ll have to pay taxes on the amount at a later time. If, on the other hand, your contributions are made after taxes, the money in your investment account is all yours once you reach retirement age.

One advantage, however, to contributing to a retirement plan before taxes is that your adjusted gross income will be decreased, so you’ll pay lower income taxes during the years before you retire.

Before you make a final decision

Before you make a final decision on a 401k or open an IRA, consult a financial planner. There are many details involved in both of these retirement plans, and unless you're a financial expert and are willing to do tonsof time-consuming research on your own, you'll get much better advice from a reputable financial advisor. The fee you have to pay him will be a pittance compared to the difference it could make in your longterm investments. He can assess your individual situation and study all the financial options available to you before you open an IRA or join a 401k.

Open an IRA or join a 401k to secure your retirement.
Open an IRA or join a 401k to secure your retirement.

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Comments 23 comments

Sandyspider profile image

Sandyspider 6 years ago from Wisconsin, USA

In most cases you can join both. I think the important thing is to make sure you make the right investments.


Ann Nonymous profile image

Ann Nonymous 6 years ago from Virginia

Thanks for your investment wisdom, Habee! Good thorough job.


habee profile image

habee 6 years ago from Georgia Author

Yes, Sandy, in some cases, you can do both - open an IRA and join a 401k. My IRA pretty much tanked with the economy!


habee profile image

habee 6 years ago from Georgia Author

Thanks, Ann! Would you like to open an IRA for me?? lol


carolina muscle profile image

carolina muscle 6 years ago from Charlotte, North Carolina

Nice post.. very informative, habee!!


Hello, hello, profile image

Hello, hello, 6 years ago from London, UK

Great advice and good information for people to bring back hopes and a future.


sheila b. profile image

sheila b. 6 years ago

I've always thought 401K's sound like social security as explained to us by our high school teacher. If only the government had done as they told the people they were going to do! Habee, yesterday you were at the top of my list with 100, and I was so pleased. Today you're down 4 points. What's going on with these scores??


kowality profile image

kowality 6 years ago from Everywhere

Good Info Habee. Thank you. I'm lucky, my Gal is an excellent bookkeeper and even does some CPA stuff.


JenDobson27 profile image

JenDobson27 6 years ago

At this point I don't know if anything is really safe to invest in! The economy is still terrible and to be honest I don't see things getting much better any time soon. In fact, unlike many people out there I believe things could get quite a bit worse before they get better. Sorry, I don't mean to be a downer :)


Pamela99 profile image

Pamela99 6 years ago from United States

Habee, Good hub. I think it is so difficult to figure out what to do today with everything seeming so unstable. This was a good informative hub.


habee profile image

habee 6 years ago from Georgia Author

Thanks, Chris!


habee profile image

habee 6 years ago from Georgia Author

HH, I think I'm too old to hope! lol


habee profile image

habee 6 years ago from Georgia Author

sheila, my score always bounces around like a bad yoyo!


habee profile image

habee 6 years ago from Georgia Author

Johnny- lucky guy! Send her my way!


habee profile image

habee 6 years ago from Georgia Author

True, Jen. If the dollar continues to decline, gold will go up. Let's start mining for gold bullion!


habee profile image

habee 6 years ago from Georgia Author

Thanks, Pam. You're right - it's getting scary!


frank 6 years ago

Very helpful advice. Especially now that tax time is approaching and I've procrastinated...again.


habee profile image

habee 6 years ago from Georgia Author

Thanks, Frank! Come back and read more hubs any time!!


akirchner profile image

akirchner 6 years ago from Central Oregon

I should have my accountant brainiac husband read this! I seem to do great with everything in the world except numbers and things associated with them!


habee profile image

habee 6 years ago from Georgia Author

I hear ya, Audrey! My traditional IRA tanked with the economy!


tonynosense profile image

tonynosense 6 years ago from Japan (for now)

Buy down and sell up. Now is a good time to invest although not as good as it was when the market crashed.

It is hard to go against the trend though. I'm kicking myself since I had more to invest a couple of years ago.. Oh well, at least I did not sell then.


habee profile image

habee 6 years ago from Georgia Author

Live and learn, Tony! Thanks for reading!


MeanGreen profile image

MeanGreen 4 years ago

While you can't technically borrow money from an IRA, in a ROTH IRA you are allowed to pull back your distributions penalty free (just not any accumulated interest). So that is a cool way to keep a "security fund" that continues to grow at a higher rate.

I like your hub. I just wrote one of my own about retirement and talked about 401K's, Roth IRA's, and Simple IRA's. There is so much information it is hard to keep the hub brief, but you did a nice job outlining the important points of the 401K and IRA.

Thank you.

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