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PENSCO Blog

Fresh alternative asset insights and the latest news on real estate and private equity investing.

IRA vs. 401(k)? Maybe You Don’t Have to Choose

  |  By Christopher Orr

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

IRAs and 401(k)s may offer account holders tax-advantages when it comes to saving for retirement. There is no rule that states that if you use a 401(k), you cannot also use an IRA—and vice versa.

What is an IRA?

A traditional IRA is a retirement savings account that offers tax-deferred growth, so the assets in the account may not be taxed until you withdraw them. With a Roth IRA, you pay taxes up front on your contributions so at the time of distribution, if you’ve satisfied the requirements, qualified distributions are tax-free. There is no need to be eligible for an employer-sponsored 401(k) to contribute to an IRA.

What is a 401(k)?

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.

IRA vs. 401(k)

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

 

401(k)

IRA

Who is eligible to participate?

Employees 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 who has earned income. Please note that Roth IRA contributions are subject to income limitations

What are the contribution limits?

  • For investors under the age of 50, the annual contribution limit is $18,500 for 2018.
  • For investors who are 50 and older the contribution limit is $24,500 for 2018.
  • Investors under the age of 50 are subject to a contribution limit of $5,500 for 2018.
  • Investors who are 50 and older are subject to a contribution limit of $6,500 for 2018.

Or:

  • No more than your taxable compensation for the year, if your compensation was less than the dollar limits above.

What are the investment options?

401(k) investment options are set and limited by the plan, and they are typically limited to exchange-traded assets, like stocks, bonds and mutual funds.

You have the flexibility to choose from 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 are available so you can maximize your savings.

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity.  Alternative investments are not FDIC insured and are subject to risk, including loss of principal.  PENSCO is indirectly affiliated with a registered broker dealer and with a licensed small business investment company through Opus Bank (“Opus Affiliates”).  Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.