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401(k) vs IRA? Why not use both?

  |  By Karen Walls

When deciding how to save for retirement many investors spend time mulling whether to choose a 401(k) or an IRA. The good news is that it doesn’t need to be an either-or question. If you are eligible, why not use both types of retirement accounts to grow your nest egg?

A 401(k) and an IRA offer account holders tax-advantages when it comes to saving for retirement, and there is no rule that states that if you use a 401(k) you cannot also use an IRA.

As this Daily Worth blog explains, 401(k) plans are employer-sponsored retirement savings plans and many employers offer a matching contribution up to a certain percentage of your salary. The money you contribute to the plan is pre-tax, meaning you will not pay taxes on it until you make a withdrawal to use for retirement.

You do not need to be eligible for an employer-sponsored 401(k) to contribute to an IRA.  A traditional IRA offers tax-deferred growth so the assets in the account are not taxed until you withdraw them. With a Roth IRA, you pay taxes upfront on your contributions, meaning your savings grow tax-free.

Before deciding whether you are going to use a 401(k), an IRA or both, it helps to understand the two plans and how they differ.

  401(k) IRA
Who is eligible to participate? Investors who work for a company that offers a 401(k) plan. 
  • Traditional IRA: Any investor who is under the age of 70½ and earns an income.
  • Roth IRA: Any investor can open a Roth IRA but the ability to contribute to a Roth IRA is subject to an income cap
What are the  contribution limits?
  • For investors under the age of 50 the annual contribution limit is $18,000 for 2016.
  • For investors who are older than 50 the contribution limit is $24,000 for 2016.
  • Investors under the age of 50 are subject to a contribution limit of $5,500 for 2016.
  • Investors who are older than 50 are subject to a contribution limit of $6,500 for 2016.
What are the investment options?401(k) investment options are typically limited to exchange-traded assets, like stocks and bonds, which the employer’s plan has pre-selected.Flexibility to choose among a wide range of options, including stocks, bonds, mutual funds and ETFs. Self-directed IRAs allow account owners to hold non-traded investments such as real estate, private equity and gold.
How to open an account?Many employers that offer 401(k) plans automatically enroll new employees in the plans and allow them to make contributions using automatic payroll deductions. Most banks and brokerages can help you open an IRA either in-person or online. For more information on opening a PENSCO IRA you can click here.

When it comes to planning for your retirement it’s important to understand all the options that available so you can maximize your savings. And remember, if you switch jobs or retire, be sure you take the time to decide how you want to manage your retirement accounts. Rolling over your 401(k) dollars into an IRA can help boost your account balance while also investing beyond the world of exchange-traded assets that are typically offered by a 401(k) plan.

PENSCO’s Blog is purely for educational purposes.  PENSCO does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Individuals are encouraged to seek professional advice before making any investment decision. Investments are not FDIC insured and are subject to risk, including the loss of principal.