As of 2018, about 58 million Americans had a 401(k), while around one-third of households owned an individual retirement account (IRA).1, 2 Yet for as commonplace as these retirement accounts can be, the nuances of contributions are a bit more complex.
Learn more about these retirement accounts and what to consider when allocating your retirement contributions.
401(k) vs. IRA: The Basics
There are several key differences between these two kinds of retirement accounts, and your unique circumstances often will dictate whether you contribute to a 401(k), an IRA, or both.
Which Account Should You Contribute to First?
If you have a 401(k) available through your employer, you can contribute to both it and any IRA at the same time, for a maximum contribution of $25,500 per year (or $33,000 for those age 50 and over). But if you cannot afford to max out both accounts, you may want to consider the below framework to try and get the most bang for your buck.
First, determine whether your employer offers a match for 401(k) contributions. Any matching funds do not count against your own contributions and aren't taxed, essentially making them "free money." If your employer matches, it often makes sense to contribute to this account at least enough to get the full available match. Savers may then want to consider contributing to an IRA, then returning to 401(k) contributions once the IRA has been maxed.
If your employer does not offer a company match, it may make more sense to begin your retirement savings with either a traditional or Roth IRA, since these accounts tend to have lower fees and more investment options. And for those who are in a relatively low tax bracket, paying these taxes on IRA contributions now (and avoiding them in retirement) may minimize their overall tax burden.
Because the decision whether to contribute to an IRA, a 401(k), or both is a highly individualized one, it is a good idea to talk it over with your financial professional before taking the plunge.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax. The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
Content Provider: WriterAccess
LPL Tracking 1-05091415