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Retirement Planning: Should You Put Money Into a 401k or IRA?


Rick Pendykoski is the owner of Self Directed Retirement Plans LLC

Saving for retirement is a critical part of financial planning. It helps you ensure that you will be comfortable and secure after retiring from work. But simply putting money away isn’t enough. It’s also important to understand how to maximize your savings so they last you through the golden years.

Most people use either a 401(k) or IRA to invest their retirement savings and help them grow. Let’s look at 401(k) vs IRA in more detail, so you can choose which one fits your

401(k) vs IRA: What’s the Difference?

Here’s what you should know about both types of retirement plans: 

A 401(k) or 401k plan is sponsored by your employer and funded from your paycheck. You can contribute a maximum of $19,000 annually if you’re under 50 years of age, and $25,000 after age 50. Required Minimum Distributions or RMDs start when you’re 70.5 years old.

An IRA or Individual Retirement Account is a self-funded retirement plan. You can contribute up to $6,000 annually if you’re under 50 years of age, and $7,000 if you’re 50 or older. This is a combined limit for contributions to traditional IRAs and Roth IRAs. RMDs begin at 70.5 years of age, but you can make withdrawals from age 59.5 onwards. Roth IRAs have no RMDs.

You will need to pay income tax on withdrawals from both retirement plans, except with Roth 401(k)s and Roth IRAs, which are funded with post-tax income.

401K vs IRA: Benefits of Each Plan Type

Both plans offer their own benefits, depending on your needs.

Benefits of a 401k:

• Many employers offer matching contributions

• High limit for annual contributions

• Reduction in taxable income for years when you make contributions

• Higher income does not limit eligibility

• Cost of investments is often lower than market cost

Benefits of an IRA:

• Wide selection of investment funds

• Reduction in annual taxable income when you make deductible contributions

• You can start making withdrawals at a younger age

So Which Plan Should You Choose?

The biggest factor affecting this decision is whether your employer offers a 401k match or not:

• If your employer offers matching contributions:

Matching employer contributions are basically free money, so leverage these to the maximum. An employer 401k match is usually capped at an upper limit, based on how much of your earnings you contribute. 

Figure out what percentage of your income you should set aside for 401k contributions, so that you can maximize the portion your employer will match. After that, put money into an IRA. If you can save more after maxing out your IRA contributions, put these extra savings into your 401k.

• If your employer doesn’t offer a 401(k) match:

Without matching contributions from your employer, you might be better off prioritizing an IRA over a 401k. After you have maxed out the annual contribution limit for your IRA, put extra retirement savings into a 401k. 

Along with access to more investment funds, you may also get a tax deduction on your annual income by contributing to a traditional IRA or Roth IRA. If you expect to receive Social Security benefits or other retirement income, a Roth IRA is a smart choice since it doesn’t have required minimum distributions.

Well-buffered finances can go a long way towards making your retirement planning process smoother. Check for benefits programs offered by your employer, but don’t restrict yourself to these. If you are lagging behind on retirement planning start it right away as it is never too late to catch up. Save as much as you can today, if you want a comfortable retirement tomorrow!

Author Bio:

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm and self-directed ira service provider based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning. Over the last 10 years has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement. You can also find his writing on, SAP, MoneyForLunch, Biggerpocket, SocialMediaToday, and NuWireInvestor. If you need help and guidance with traditional or alternative investments, email him at email him at rick@s

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