Should You Have An IRA, 401(k) Or Both?

If you are serious about saving for retirement, you may be wondering where the best place is to put your money. Should you put it all in your employer’s 401(k)? Or should you set up an individual retirement account (IRA) and fund your retirement that way? Or should you do both?

Ideally, you should try to max out both. If that’s not an option, and your employer offers a 401(k) with a company match, fund it to the point where you get the maximum matching dollars. After that point, call us and we will provide you with personalized advice regarding your particular situation.

To make the best decision for your specific situation and your savings preferences, you need to know the particulars of each.

About the 401(k)

For starters, the 401(k) plan is an employer-sponsored plan so you must work for a company in order to participate in one. Here are some other key features of a 401(k):

  • Contributions are usually made through payroll deductions.
  • It can offer loan privileges.
  • It can have an employer match provision.
  • You can contribute up to $18,500 (as of 2018).
  • The catch-up contribution limit for employees age 50 and over is $6,000 (as of 2018).
  • Limited investment selection compared to an IRA.
  • The 401(k) plan usually has better creditor protection than an IRA since it is an employer-sponsored investment plan.
  • Distributions in retirement are taxed as ordinary income.
  • Required minimum distributions begin at age 70½.

About the IRA

In most cases anyone under the age of 70½ who earns income can participate in an IRA. Other key features of an IRA include:

  • You contribute by making deposits on your own to an IRA.
  • The IRA does not have loan privileges or employer match provisions.
  • You can contribute up to $5,500 (as of 2018).
  • The catch-up contribution limit for individuals age 50 and over is $1,000 (as of 2018).
  • Larger investment selection compared to a 401(k).
  • Distributions in retirement are taxed as ordinary income.
  • Required minimum distributions begin at age 70½.

Limits in contributing to both

If you or your spouse has access to a workplace retirement plan such as a 401(k), you may not be able to additionally make a tax-deductible contribution to an IRA if you earn too much. The IRA tax deduction is phased out for those who earn more than $63,000 ($101,000 for couples) in 2018, $1,000 more per person than last year, according to a recent article in U.S. News and World Report Money.

And 401(k) participants who earn more than $73,000 ($121,000 for couples) cannot deduct an IRA contribution on their tax return. If only one member of the married couple has access to a workplace retirement account, the tax deduction is phased out if the couple’s income is between $189,000 and $199,000. Those who don’t have access to a 401(k) or similar type of workplace retirement account are eligible to make tax-deductible contributions to an IRA regardless of their income level.


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