IRA vs. 401(k): 9 ways these popular retirement plans differ featuring Michael Burke
Americans have several choices when it comes to saving for retirement, and two of the most popular options are a 401(k) plan and an individual retirement account (IRA). Assets in 401(k) plans totaled $5.9 trillion as of Sept 30, 2019, according to the Investment Company Institute (ICI). Meanwhile, IRAs had a massive $9.8 trillion balance in the same period, says ICI.
Many people get the two plans confused, and it’s understandable, given the many similarities between them. Both offer the potential for tax-deferred investment growth (or tax-free growth if you opt for the Roth versions of either plan), tax breaks on contributions and the ability to invest in assets such as stocks and mutual funds that have a higher potential return than savings accounts and bonds.
With so many similarities, which one should investors choose? Well, if you can max out your contributions to both, then you won’t have to choose — while enjoying the full advantages each has to offer. But even though it’s permitted, many people can’t afford to do so.
Forced to choose, many experts believe the 401(k) is the clearly superior option.
“There is actually no comparing IRAs and 401(k)s,” says Joseph Auday, retirement planner with Steel Peak Wealth Management, citing the 401(k)’s higher contribution limit and the potential for an employer match. “If you’re not taking advantage of your 401(k), you’re missing out.”
However, other advisers also stress that both plans remain valuable to retirement planning.
“IRAs and 401(k)s can both provide unique value to an individual’s retirement strategy, with key uses and specific pros and cons worthy of consideration,” says Michael Burke, CFP at Lido Advisors.
Below are nine key ways in which a 401(k) and an IRA differ. We’ll also discuss which one may be a better fit for your personal retirement situation.