401(k) or IRA: what a choice!

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Step one: saving for retirement when it’s so far away

KJ: Especially at a young age, when you are saving for retirement, you’re literally setting money aside for 30 or more years from now! Fortunately, the younger you start and the longer time-period you have before retiring, the greater your chance of having a successful retirement since your savings can compound over very long periods of time and have your money work for you!

Step two: what are the options?

So now that you’ve decided to save for retirement (convincing intro, right?), let’s look at some options. The most common retirement savings vehicles are 401(k)s and IRAs. Don’t feel excluded if you are saying to yourself “hey, I have a 403(b), what is that?” as those are pretty much the same as a 401(k) (with a few exceptions).

As most everyone has limited resources (sorry Bill Gates if you’re reading this – it might not apply), it can be a challenge deciding whether to contribute to your 401(k)/403(b), your IRA, or a combination of the two. Let’s take a look at a few highlights of the account types.

Step three: a closer look

401(k)

  • You can potentially contribute up to $17,500 for 2013 (and even more if you’re over 50 – you can contribute an extra $5,500), regardless of income.
  • You have limited investment options – this can be a good or bad thing depending on your level of experience and preference for selecting your own investments.

Individual Retirement Account (IRA)

  • They have a much lower contribution amount: you can contribute up to $5,500 for 2013 (and if you’re over 50 an extra $1,000).
  • There are income limitations that start at $95,000 for married individuals for a Traditional IRA, and almost double that income limit – $178,000 – if you’re contributing to a Roth IRA.
  • They have far more investment options available than a 401(k).
  • The money in the account is a little easier to get access to than a 401(K) (although neither account is without potential IRS tax penalties depending on your age and the circumstances) – a potentially good and bad thing as you shouldn’t touch the money until retirement.

Step four: putting it all together

401(k), IRA, then 401(k)?…let’s explain
If you are one of the fortunate few to have an employer match on your 401(k), then the decision can be a little easier. You should minimally contribute up to your employer’s match. What’s better than an instant 100% return on your money!? Even if the investment options pale in comparison to your IRA options available, an employer match is just too good to pass up.
Once you have met the employer match, then consider setting additional retirement funds aside in a Traditional IRA or Roth IRA if you are eligible and aren’t passed the income limitations.
If you still find yourself wanting more savings for retirement, then consider contributing the remaining to your 401(k) up to the yearly limitations.

If you don’t have an employer match, then depending on your level of investment experience, you may prefer to take the route of contributing to an IRA where you have far more investment options. If ease is the name of the game for you, then your 401(K) with limited investment options (usually less than 20) might be a great place to start.

Related posts:

    Are you contributing to a 401(k), IRA, or both?
    Does your employer provide a 401(k) match?
    Share your retirement saving strategies!

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