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Navigating Retirement Savings: 401(k) vs IRA

August 10, 2023

When it comes to planning for your golden years, deciding where to invest your hard-earned money can be a daunting task. With a myriad of options available, one question often arises: Should you prioritize contributing to an Individual Retirement Account (IRA) or an employer sponsored plan such as a 401(k)? In this blog, we'll guide you through a strategic approach to help you make the most of your retirement savings. From maximizing employer contributions to optimizing investment flexibility, we'll uncover the key steps to consider in your retirement investment journey.

Seize the Match: Start with Your 401(k) or Roth 401(k):
Before delving into the intricacies of IRA contributions, it's crucial to grasp the importance of employer matches. Many employers offer matching contributions to your 401(k) or Roth 401(k), which is essentially free money. Here's why you should make this your first priority:

  1. Maximize Your Benefits: Contributing enough to receive your employer's full matching contribution maximizes the return on your investment right from the start.
  2. Immediate Boost to Savings: Employer matches provide an instant boost to your retirement savings, allowing you to accelerate your financial growth.

Expand Your Horizons: Maximize Your IRA:
Once you've secured your employer match, it's time to explore the benefits of Individual Retirement Accounts, both Traditional and Roth. Here's why you should consider maxing out your IRA next:

  1. Investment Flexibility: IRAs often offer a broader range of investment options compared to 401(k)s, giving you more control over your portfolio's composition.
  2. Potential for Lower Fees: Some IRAs offer the opportunity for lower management fees compared to certain 401(k) plans, helping you keep more of your returns.
  3. Tax Benefits: Traditional IRAs offer tax-deferred growth, while Roth IRAs provide tax-free withdrawals in retirement. Choose the one that aligns with your tax strategy.

Round Out Your Contributions: Return to Your 401(k):
After maximizing your IRA contributions, it's time to revisit your 401(k) to further bolster your retirement nest egg. Here's why this step is vital:

  1. Higher Contribution Limits: 401(k)s generally have higher annual contribution limits than IRAs, allowing you to save more for retirement on a tax-advantaged basis.
  2. Convenience: Contributing to a 401(k) can be convenient, as contributions are automated through payroll deductions.
  3. Diversification: Balancing contributions between your 401(k) and IRA can provide a diversified retirement portfolio, potentially reducing overall risk.

Final thoughts

The decision of whether to prioritize investing in an IRA or a 401(k) depends on your unique financial situation and retirement goals. However, a strategic approach involves seizing employer matches first to capitalize on free money, then maximizing the advantages of IRAs for investment flexibility and potential fee savings. Finally, returning to your 401(k) to further enhance your retirement savings completes a well-rounded strategy. Remember, the road to retirement success is paved with informed choices and prudent financial planning. By carefully considering these key points, you'll be well on your way to a financially secure and rewarding retirement journey.

Disclaimer: This is meant for educational purposes only. Information presented should not be considered investment advice or a recommendation to take a particular course of action. Always consult with a financial professional regarding your personal situation before making any financial decisions. Withdrawals from a Traditional IRA prior to age 59 ½ will be subject to ordinary income tax and may also incur a 10% penalty tax unless an exception applies. Contributions to a Roth IRA are subject to income limitations.  You may take nontaxable withdrawals from a Roth IRA if you are at least 59 ½ and the account has been held at least 5 years. Otherwise, earnings withdrawn may be subject to ordinary income tax and a 10% penalty.  All investing involves risk and there is no guarantee that any strategy will ultimately be successful.