Hi SA family,
Awhile ago I posted ago contributing to my IRA vs 401(k). Someone shared with me the cons in doing so; however, I can't find the post.
my company has a 401(k) no match and I thought it would be best to contribute to my IRA instead. Can someone share with me if this is a good idea or not? And why not
January 6th, 2021 at 06:52 am 1609915947
If you use an IRA, you have total control over what you invest in, but you pay any administration fees.
Your 401k has a choice of investments, but how varied it is depends on your company’s plan. They are usually pretty well vetted funds, but some people like more choices. Usually the company pays administrative costs. I think novices should use the 401k, but that,is just me.
Some 401k plans have loan options.
Depending on your income, you can invest in both a 401k and an IRA.
You also need t choose Roth or not. For Roth, you pay taxes on the money you invest now, but you withdraw money and gains tax free later. And you can withdraw what you put in, but not gains, without penalty.
For a traditional IRA or 401k, the money you invest is pre tax now, and you pay taxes on both your contribution and any gains when you withdraw, You cannot withdraw without penalty until you are 591/2.
If you do traditional, depending on your tax bracket, you might get up to $.25 for every dollar you invest. The bet you make is that your tax bracket will be lower when you retire. Also, you potentially have more money to invest now so more money to earn gains with. I think you would be best served with a traditional 401k because you still have debt and so probably can’t max out your contribution yet. This would let you invest more.
Hope that helps.
January 6th, 2021 at 04:22 pm 1609950149
However, employer plans have higher annual contribution limits. If you are planning to contribute 6k or less (7k if 50 or better), then you can do that in your IRA. If you plan to contribute more, you will need to use your employer plan (to enjoy tax advantages).
My current employer plan is a 457 plan; these are nice because there is no minimum age to make penalty-free withdrawals. Might come in handy.
Also, a Roth IRA is so very versatile. It can serve as a back-up emergency fund, or whatever else you need it to be. Your own contributions (but not the growth or conversions less than 5 years old) are available to you at any time, no tax or penalty. This is not true of a Roth 401k.
January 7th, 2021 at 02:03 am 1609985029
Also depends on whether you do the traditional or Roth option. A regular 401k (non-Roth) lowers your federally taxable income and thus your adjusted gross income (AGI), and you don't have to worry about whether the contribution will be fully deductible. A single person whose gross income is over 66k in 2021 will have the IRA contribution not be fully deductible.
So if you are looking at contributing amounts that are under 6,000, it doesn't matter much. But if you can contribute more than that, a 401k will allow you to reduce your federally taxable income more.
January 9th, 2021 at 02:03 am 1610157807
401k has required minimum distributions each year in retirement; Roth doesn't.
Roth has virtually unlimited investment options; 401k doesn't.
Generally speaking, investment expenses are higher with a 401k.
Roth isn't tied to your employer so if you change jobs, you don't need to do anything. No rollover needed. You can just keep funding the Roth the same as always.
401k can decide to drop investment options that you are using and replace them with something else. We've had that happen to us. Not an issue with the Roth.
I'm sure there are some other advantages of the Roth but those are the ones that come to mind right now.