Should You Choose an IRA or a 401(k)?

Ah, the question that has baffled American workers since forever. With so many considerations to keep in mind, sometimes it can feel impossible to decide between an IRA and a 401(k). How do you know which is best for you and your family? How can you know which will yield the best results for an event that is still 30, 40, or even 50 years away? 

 

When considering the ever-intense battle between a 401(k) and an IRA, you’re probably thinking about the matching contributions, the lacking investment options in a 401(k), and all the benefits of an IRA. What should you do? While we can’t offer a universal solution that works for all readers, we can help make sense of it so you can make an informed decision. 

 

• Also Read: 3 Reasons Certain Federal Employees Can Retire Years Earlier Than Their Peers Without Penalties
• Also Read: CSRS Retirement in 2024: Are You Making the Most of What This Classic Plan Has to Offer?
• Also Read: Roth IRA Basics for Beginners: What’s There to Learn?

Firstly, it’s important to learn about your 401(k) and your options moving forward. Don’t get yourself into a panic when a rollover may not be an option right now. For example, if you’re still with the employer that holds the 401(k), you cannot roll the account over into an IRA. After reaching 591/2 years of age, you might then have more options with a rollover. Some plans also allow you to contribute to a 401(k) before converting (in-service) to a Roth IRA. 

 

Either way, you’ll need to wait until this age or leave your current employer for this to happen. The good news is that a rollover isn’t automatically the best choice for everybody. Just because you’ve seen some people enjoy a rollover, don’t assume the grass is greener on the other side for you. 

 

If it’s diversification you seek, the 401(k) provides plenty in the shape of low-cost institutional funds and other investment options. What’s more, one of the greatest benefits of all with a 401(k) is that your employer is a fiduciary. What does this mean? You’re protected by federal law, and your best interests are ALWAYS the priority. 

 

If you change employer, you can roll your balance over to the new employer, which means taking loans from the plan. Sadly, an IRA wouldn’t offer this same flexibility. 

 

For those considering a rollover from a 401(k), you’ll be glad to know that taxes are only applied when converting to a Roth IRA. Ultimately, some people benefit from rolling their 401(k) balance into an IRA while others suffer. The only way to learn whether a conversion makes sense for you is to consider your position and speak with a financial/tax professional for personalized advice.