Clash Of The Titans: IRA Vs 401K

You’ve probably heard a lot about 401k’s and IRA’s. But do you know which is better?

401k’s are employer sponsored retirement accounts. Unfortunately not everyone has access to those. Meanwhile, anyone can open a Roth or Traditional IRA. To be honest, you should max out contributions to both accounts.

But maxing out both may not be an option for you. So the real question here is, should you contribute to your IRA or 401k first?

I’ll give you two answers, one will be a short “quick version” while the other will be a detailed comparison and contrast analysis via chart below (as in, the actual clash of the titans you came here for.)

Enjoy!

The Quick Answer: IRA Vs. 401k

  • If your employer offers a 401k with a company match.

Contribute to your 401k only to the point where your employer will no longer continue matching your contributions so that you can get as much free money as possible. Then consider an IRA.

  • If your employer doesn’t offer a company match.

Start with an IRA first (opening one is free.) After contributing up to the limit, contribute to your 401k for the pre tax benefit it offers.

 A Detailed Comparison of The 401k, Traditional IRA, and Roth IRA: Clash Of The Titans

  401k Traditional IRA Roth IRA
2018 contribution limit $18,500 for those under age 50.

 

$24,500 for those age 50+.

$5,500 as a combined IRA limit. $6,500 for those age 50+.
Pros Employer contribution match. (If offered.)
Higher annual contribution limit.
Contributions lower taxable income in the year they are made.
Eligibility is not limited by income.
Able to borrow up to $50,00 or 50% of your 401k’s value, whichever is greater.
Large investment selection.
If deductible, contributions lower taxable income in the year they are made.
Large investment selection.
Qualified withdrawals in retirement are tax free.
Contributions can be withdrawn at any time.
No required minimum distributions when you retire.
Cons No control over plan and investment costs.
Limited investment selection.
Distributions in retirement are taxed as ordinary income, unless a Roth 401k.
Required minimum distributions start at age 70 1/2.
Contribution limits are lower than a 401k.
Deduction phased out at higher incomes if you or your spouse are covered by a workplace retirement account.
Distributions in retirement are taxed as ordinary income.
Required minimum distributions begin at age 70 1/2.
Contribution limits are lower than a 401k.
No immediate tax benefit for contributing.
Ability to contribute is phased out a higher incomes.
Bottom line Fund a 401k first if your company is willing to match your contributions. Fund an IRA first if your 401k doesn’t offer a match or if you can’t get a 401k.

 

If you max out your IRA, start funding your 401k. Are you not sure which IRA is best for you?

 

If you plan on being in a higher tax bracket when you retire, choose a Roth. (Yea. I know that isn’t the easiest thing in the world to predict.)

 

Keep reading to read more useful information about IRA’s and 401k’s, along with the conclusion to this article.

 

  401k Traditional IRA Roth IRA
Tax treatment of contributions Contributions made with pretax dollars, which reduces your taxable income on a dollar for dollar basis. Some employers offer a Roth 401k option, funded with after tax dollars.
Investments in the account grow tax deferred. If Roth 401k, investments grow tax free.
Contributions are deductible. Higher income and participation in a workplace retirement account (for you or your spouse, if married filing jointly) may reduce or eliminate deduction.
Investments in the account grow tax deferred.
Contributions are not deductible.
Investments in the account grow tax free.
Investment options Limited choice of investments.

 

Some plans have a brokerage option with access to investments outside of the plan.

Any investment available through your account provider (stocks, bonds, mutual funds, etc.).

 

Taxes on withdrawals after age 59 ½. Distributions are taxed as ordinary income. If Roth 401k, distributions are tax free. Distributions are taxed as ordinary income. Distributions are tax free as long as the account has been open for at least five years.
Early withdrawal rules before age 59 ½. Unless you meet an exception, early withdrawals of contributions and earnings are taxed and subject to a 10% penalty. Unless you meet an exception, early withdrawals of contributions and earnings are taxed and subject to a 10% penalty. Contributions can be withdrawn at any time without taxes or penalties.

 

Unless you meet an exception, early withdrawals of earnings may be subject to a 10% penalty and income taxes.

 

If you’ve got enough money, max out both. Otherwise, fund your 401k to the point where you max out your employer contributions for the year, then max out your IRA. And if you have a lot of money to invest, consider establishing a Self Directed IRA LLC.

A Self Directed IRA LLC offers the same benefits as a Traditional or Roth IRA, but with even more investment opportunities available for you to choose from, such as real estate, along with asset and liability protection up to one million dollars.

Fair warning though, a Self Directed IRA LLC requires more involvement on your part and is not intended for passive investors. I’ll tell you this though. If you’re already investing in real estate with your personal funds there’s no reason for you not to get a Self Directed IRA.

 

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