5 Things to Consider when Choosing Between 401(k) and IRA

by Brian Bowen

There’s no question that for those who are concerned about their finances and their ability to eventually retire, the right investment option is important, but finding it isn’t always easy.

These are many different retirement accounts, but for most, the question will come down to whether a 401(k), IRA or ROTH IRA is the right call. A competent financial planner will consider all the pros and cons. A closer look will help you figure out which is right for your situation and your future. Here are some things to consider:

  • 401(k) plans are generally offered through employers; IRAs may be opened by anyone under age 70 who has earned income. Sole proprietors have the choice to set up a Solo 401(k). These accounts can have excessive fees for small employers, so be careful to read all the fine print.
  • The IRA annual contribution limit is $5,500. The 401(k) cap is $18,000. Catch-up provisions for those age 50+ allow an additional $1,000 for IRA’s and $6,000 for a 401(k).
  • 401(k)’s usually offer 20-30 investment options and often allow little to no input regarding where the money is invested. With an IRA, you have thousands of options and freedom to invest as you see fit.
  • Both offer tax breaks and incentives that help you save on tax payments, significantly boosting income over the course of your life.
  • Both can be accessed before retirement age, but doing so will most likely incur penalties. You may consider a ROTH IRA that is funded with after-tax contributions, but you can remove the basis (what you contributed) without an IRS penalty, as long as other conditions are met.

For many, it may seem the answer is determined simply by whether or not their employer offers a 401(k). However, it’s important to understand that you don’t necessarily have to choose between them. Millions of Americans have both an IRA and a 401(k), and if you’re able to qualify for each of them then it may make sense to enroll in both.  Even seemingly small contributions can add up quickly. Discussing your options with a qualified financial advisor, in the context of a comprehensive plan, is the smartest way to ensure you make an informed decision.  Your choice will have an impact on current and future taxes, your estate, and the values you and your beneficiaries ultimately receive. Contact us at 540-266-3100 to find out which option is right for you.

As President of a Registered Investment Advisor firm, Brian has a fiduciary obligation to work in the best interest of his clients – and only his clients. As an independent advisor and not part of a large corporate entity, Brian can select from hundreds of products and services that are the most beneficial for his clients’ needs.

Brian W. Bowen