Should You Have a 401K, an IRA Or Both?
Everyone’s personal circumstances are different in every way, including financially. Your goals for your entire financial future (and present) all play a role in what your particular goals are for your retirement savings, and what your plan should be for how to get there. Because of this it’s hard to say whether you should have a 401k, an IRA, or both–but you can look at the advantages and disadvantages of all these options, see how they apply to your situation, and use that to make the decision you believe will work best for you.
A 401k is an account you set up through your employer. Most often these are traditional accounts, which means your contributions are taken out of your income before taxes are taken out. This both lowers your yearly income in the eyes of the US government, and has you put off paying taxes on this income until you make withdrawals in retirement.
Your employer will pick a variety of investment options for you and have you pick from several investment packages, which you can switch between at any point over the years. When you leave your job you can take this account with you to your new employer, leave it where it’s at, cash it out (while paying a large penalty for early withdrawal), or roll it into an IRA.
An IRA, or independent retirement account, is something you can set up independently. You pick a financial company of your choosing and pick your own investments from a seemingly never ending list of options. You can set up the account to be a traditional account (with your contributions from your pretax income) or a Roth account (contributions from your after tax income). The biggest difference between these accounts and a 401k is that amount of control you have over your options.
Often, to diversify your tax interests both now and in retirement and diversify your investment choices, people will set up both a 401k and an IRA, traditional or Roth. This can be a great decision if you want to expand how you are investing for your retirement.
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Retirement savings doesn’t have to be so confusing. In order to save enough for your goals you’ll want to learn more about your options like 401k and IRA contributions, balance goals, and how the 401k deduction works.
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