Comparing IRA to 401(k)
Q: Which is better to invest excess savings?
A: If your employer’s 401(k) or similar retirement plan offers matching contributions, you should be contributing enough to take full advantage of this. In other words, if your employer is willing to match your contributions up to 5% of your salary, this is the least you should be contributing.
Assuming that you’re doing this, you can then put your additional contributions into your plan or an IRA, and both options have advantages. The obvious advantage of increasing your 401(k) contributions is simplicity. All of your retirement savings will continue to be in one place, and 401(k) investments require minimal maintenance.
On the other hand, an IRA can give you far more control over your retirement savings. While 401(k) investments are generally limited to a selection of a few dozen mutual funds at best, in an IRA you can choose from virtually any stock, bond or mutual fund you want. If you want to put some of your retirement savings in Apple stock, you can do that in an IRA. There are also a few reasons you can tap into your IRA early that don’t apply to your 401(k).
A word of caution: If covered by an employer’s retirement plan, your ability to take a traditional IRA tax deduction is limited, and Roth IRA contributions are income-restricted for everyone. So, before you consider an IRA, check current income limits and make sure you’re legally allowed to participate.
Matthew Frankel owns shares of AAPL. The Motley Fool owns shares of and recommends AAPL.