401(k) vs. IRA? Use both if you can
How much you save now may determine how comfortable you are in retirement. Combining 401(k)s and IRAs can make it even comfier.
If your employer offers a retirement plan, like a 401(k) or 403(b), and will match a percentage of your contributions, you should definitely take advantage of it—after all, it's free money for you. Plus you'll have a tax-deferred account that makes saving a cinch through automatic payroll deduction.
If your employer doesn't offer a plan, then an IRA can be a good start to your retirement savings and another opportunity for your earnings to grow tax-free.
Facts & figures you need to know
Who can participate
Anyone who works for an employer that offers a plan.
Effective for 2020 contributions, anyone with earned income can open and contribute to a traditional or Roth IRA. For 2019 contributions and earlier, you could not make contributions to a traditional IRA after age 70½.
How much you can invest
If you're under age 50, your annual contribution limit is $19,000 for 2019 and $19,500 for 2020.
If you're age 50 or older, your annual contribution limit is $25,000 for 2019 and $26,000 for 2020.
If you're under age 50, your annual contribution limit is $6,000 for 2019 and 2020.
If you're age 50 or older, your annual contribution limit is $7,000 for 2019 and 2020.
What you can invest in
Most employers limit you to a preselected list of investment choices.
You can invest in a wide variety of mutual funds, exchange-traded funds (ETFs), and individual stocks and bonds.
How to get started
Your employer may automatically enroll you in the plan and offer you an easy way to contribute through automatic payroll deduction.
You can open an IRA on your own through almost any bank, brokerage company, insurance firm, or investment company.
Eligible for both? Go for it
The good news is that you don't necessarily have to think IRA versus 401(k). You can save with both as long as you're qualified and heed contribution and income limits.
We're here to help
LEARN MORE ABOUT IRAs
If you're eligible to invest in a 401(k) and an IRA, here's an efficient way to do it:
- Enroll in your company's 401(k) and contribute at least the amount that your employer will match.
- Contribute the maximum allowed to your IRA.
- Go back to your 401(k) plan and contribute beyond the match to the annual maximum allowed, if possible.
We recommend following these steps because an IRA offers more flexibility and choice, giving you a greater chance to diversify your assets and reduce your investment risk.