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Investing in your company’s 401(k) vs. investing in an IRA is a loaded question with a myriad of answers depending on the individual’s situation. If you were pressed for an answer on an elevator and only had a minute or two to explain, here are a few points to make sure to consider.

Both tools are used to create a long-term retirement account, so make sure your budget can make the commitment. Neither plan is very kind to premature withdrawals. There are penalties for withdrawing your money prior to age 59 1/2. 

An IRA can be very inexpensive to set up and run. The IRA also will allow you to go to the marketplace and invest in most asset classes. A 401(k) may charge anywhere between 1-3% depending on the detail of your plan, and in most cases will have a limited menu of investment alternatives.

A 401(k) will allow a much larger tax deferred contribution per year ($19,500 in 2020 and 2021) than an IRA ($6,000). A 401(k) will usually provide a website with many online calculators to help you answer that very question. In both cases, you are saving income taxes on your contribution.

Once you get started, 401(k) contributions happen automatically with every single pay period and there is very little management, if any, on your part. IRA deposits are going to rely on you to make that contribution annually.

Most 401(k)s will allow for loans against your balance – usually 50% of the vested amount up to a maximum of $50K. That can be a big plus while establishing yourself financially and possibly raising a family. No one is advising you to take a loan, as it seriously slows the growth of your retirement account, but it’s nice to have the option just in case. An IRA does not have that option. 

These days, most company plans have added a matching program in order to recruit and retain employees. In that case, make sure you get the match! Most plans will match the first 3% of salary dollar for dollar and the next 2% of salary at $0.50 on the dollar. So, step one should be to defer at least 5% of your salary to guarantee that the match is added to your account. 

Fortunately, credit card companies cannot come after your 401(k). The 401(k) is considered an ERISA (Employee Retirement Income Security Act) covered account, and therefore the assets within the plan actually belong to the plan and can only be withdrawn by the plan participant. So, your 401(k) assets are protected against creditors; however, the IRS can tap your account for back taxes and penalties.

While a 401(k) and IRA are both beneficial long-term retirement accounts that you should utilize depending on which your company offers, there are some distinct differences and benefits between the two that you should be aware of. If you have any additional questions, please don’t hesitate to reach out to discuss further!

John Hennessy
Vice President, Insurance Services at Intercontinental Wealth Advisors