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401k vs IRA

401K vs IRA

In this article I’m going to compare the 401k vs IRA. Learn which option is better for your situation when comparing the 401k vs IRA.


Note: Photo above courtesy of Stock Unlimited.



401K vs IRA: Which Is Better to Save for Retirement?

When it comes to comparing the 401(k) vs the IRA, the answer for many people is not to invest in just one or the other—it’s to invest in both. But if you receive a company match for your retirement fund such as a 401(k), then that is where you should invest first. You can’t beat free money. 🙂

So start saving for retirement by investing whatever percentage or amount gets you to the full company match in your 401(k). If you have a Roth 401(k) and intend to be in a higher tax bracket when you retire than you are in now (which I hope that you do!), it is probably a good idea to invest in the Roth 401(k).

That means, for example, that if you receive a 50 percent company match on money invested up to 6 percent of your paycheck (a fairly common matched amount), then save that much (6 percent) in your company 401(k).



Related articles:

How to Start Investing for Retirement: 5 Simple Steps
The Amazing Power of Compound Interest
9 Easy Ways to Fully Fund Your Roth IRA This Year!


Where should I invest for retirement once I have reached the full company match with my 401(k)?

Once you have contributed enough to your company 401(k) or other company retirement plan to receive the full match, then you should strongly consider investing the rest of your money allocated for retirement in Roth IRAs. (Or if you’re a very high income earner and you feel like you’ll be in a lower tax bracket during retirement, you could invest instead in traditional IRAs—or you could hedge your bets, and invest in both.)

The reason that you might want to invest in a Roth IRA once you reach the full company match instead of investing all of your money with your company 401(k) is that you will generally have many more mutual funds to choose from and therefore the possibility for higher returns with a brokerage firm than with your company retirement plan administrator.

You should invest 10 to 15 percent of you income for retirement. More is better (the more you save now the more options you’ll have later in life), so try to get to contributing 15 percent as soon as you can.

You can easily open a Roth IRA account with Schwab or Vanguard—we have investment accounts with both and both are good brokerage firms. (Note: These are not affiliate links; I just feel they are good companies.)

Which types of mutual funds should I invest in for my 401(k) or IRA?

Another important factor to think about when comparing investing in a 401k vs IRA is the funds that are available to you for investing. If your company has lousy mutual funds to choose from, then that is another great reason to invest as much as possible in an IRA instead.

When investing for retirement, I recommend investing equally in four categories of mutual funds: large cap, mid cap, small cap, and international mutual funds. Choose mutual funds from these categories that have good track records of high overall returns (generally, with average returns of around 10 percent or higher over a 5- or 10-year period; where possible, choose mutual funds that have been open 10 years or longer).


Note: Once you begin investing for retirement, I recommend that you check out a great free app called Personal Capital in order to track your progress toward reaching your retirement and other financial goals. With Personal Capital, you can see not only all of your bank checking and savings accounts and even your credit cards and other finance accounts, but you can also link your retirement and regular nonretirement brokerage accounts.

This allows you to have a complete, overall picture of your current financial situation. And you can also view your account history to see how your accounts and overall portfolio have done over time. I love this very helpful tool and use it regularly! You can sign up for your free Personal Capital account here.


I know that when I started investing for retirement I really wished there was someone who had my best interests at heart (and not their commission rate) who would just hold my hand and show me the best funds to invest in and why. And that’s why I will share with you exactly how we choose the mutual funds we invest in (for free—no strings attached). Just sign up below to receive the cheat sheet.

Which is better—a Roth IRA or traditional IRA?

After comparing the 401k vs IRA, another crucial thing to consider is whether to invest in a traditional IRA or a Roth IRA.

For many people, if they invest for retirement consistently over a long period of time like I recommend, then a Roth IRA is a better option than a traditional IRA because they will have a larger income in retirement than in their working years and so they will pay less in taxes (by being in a lower tax bracket) by investing in a Roth retirement account.

And that’s what most people should strive for—to accumulate a substantial amount of money in order to retire with dignity and provide for themselves comfortably during retirement. And it’s a worthwhile goal to aim for because having a substantial nest egg gives you more options—more options to travel, more options to care for elderly parents or children, and more options to give significant amounts to worthy causes.

A Roth IRA is also often a better option for many people who have significant tax deductions now for things such as child tax credits, charitable giving deductions, or mortgage interest deductions, for example. This is because those tax-deductible items make their taxable income lower now than it likely will be in retirement.




When looking at investing in a 401k vs IRA, there are some important things to consider.

As I noted above, in most cases when comparing the 401k vs IRA, you should invest in a company retirement account such as a 401(k) up to the amount that they match on your retirement contributions.

And then you should invest the rest of your money set aside for retirement (10 to 15 percent of you income—15 percent if possible or as soon as you can) in a Roth IRA in good stock mutual funds. By investing in a Roth IRA you will have more options and therefore generally have the potential for better rates of return on your hard-earned money. If you invest consistently each month in your Roth IRA, you will be well on your way to building long-term wealth so that you can live in comfort throughout your retirement.

By saving as much money as you can (again, a good rule of thumb is 15 percent of your income) as soon as you can, you will have much more money (because of the awesome power of compound interest) available to travel, take care of your medical needs, spoil grandchildren, give to causes you care deeply about, and more.

Are you ready to get serious about saving for your future? You can find more helpful information about investing for retirement here.


Want to Track Your Financial Progress?

Sign up for Personal Capital to be able to track how your investments as well as checking and savings accounts are doing and also view your account history to see how your accounts and overall portfolio have done over time. It’s a great tool! Sign up for your free Personal Capital account here.


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