Should i get an IRA or 401K account?

Question

So my economics teacher said he advises for my class of seniors to get an IRA account so we could build up our money for retirement. My parents have a 401K account and they say its about the same thing. I was wondering, which one should i get? which is better for my future? THANK YOU FOR THE HELP!! ^_^

Answer 1

IRA's and 401(k)'s are essentially the same thing - retirement accounts.  You can have both.  

401(k)'s are offered by employers, and you can contribute to them as long as you work for that employer.  If you transfer to another company, you have the option to transfer your 401(k) to the new company (if they offer one) or keep your money vested in the old 401(k).

In most 401(k)'s, the investment company that manages the portfolio will either have a specific portfolio for you to invest you, or they will offer a limited number of portfolios to choose from.  Many people like 401(k)'s simply because much of the guesswork is taken out of it - someone else is paying attention to the stock market.

An IRA is also a retirement savings account.  However, you have greater control over how your money is invested.  Portfolio's vary according to the investment company who manages the IRA, but with some companies you can pretty much choose whatever investment you want.  Some people like having this control.

I recently had occasion to speak with an account representative about why we might want to change funds from a 401(k) to an IRA.  In our instance, my husband is disabled from a stroke, and I quit my job to stay home and care for him and our daughter (I now run a home-based business).  What the account rep mentioned is that if we don't like the way our 401(k)'s are managed, there is little we can do.  However, if we switch over to an IRA, we can always drop a poorly performing investment a choose a better one from a large list.  We can continue to add funds to an IRA, whereas we cannot add funds to our 401(k)'s (since we no longer work for those companies).  Plus, if I recall correctly, he said if we need the funds for an emergency, they are easier for us to access in an IRA.

My husband and I have chosen to hang onto our 401(k)'s.  However, I also started a ROTH IRA as an additional retirement investment.

Personally, at this stage in your life, I would recommend opening an IRA, but with the minimal amount required.  Then just leave it alone.  You presumably have college and a career ahead of you.  You will probably want the cash for your college days (although if you find you have extra cash laying about, you can always invest it in your IRA).  Find out if you get a job with a company that offers a 401(k) - after all, some companies will match your contributions into a 401(k), so that would be a better investment of your money.

And don't forget to budget for the important stuff, first - food, shelter, clothing, an emergency fund, etc.  After all, if you cannot provide for the essentials for yourself yet, you have greater concerns than your retirement.

Answer 2

Actually the best thing to do is to have both.  Most 401(k) plans have a "matching" provision where the employer will match your contribution, dollar for dollar, usually up to the first 3% of your income.  So you should contribute to the 401(k), at least, enough to get all of the matching funds. The money that you put into your 401(k) plan is pre-tax money (money that you have not yet paid income taxes on) so the money (including the growth)  you take out when you retire is taxable at ordinary income tax rates.

  After that you should contribute the maximum each year  ($5000) into a Roth IRA ( NOT a Traditional IRA).   The money that you put into a Roth is post-tax money (money that you have already paid income taxes on) so the money (including the growth) you take out when your retire is not taxable, it is tax free!

  If you can still afford to save even more money then you should contribute the maximum to your 401(k) plan.  Because the contributions are tax deferred, that may put you in a lower income tax bracket which can increase you take home pay a little.  My take home pay went up $0.82 per week when I contributed 12% into my 401(k).  Not much, but better than nothing.

If you start contributing the maximum to a Roth IRA at age 22 and continue contributing until you are 65 then you will have $2.4 million dollars at age 65.

Answer 3

Depends on your limit and investment option.

Most companies offer matching contribution on 401Ks.  If a company matches 10%, you contribute $100 per paycheck, and your company will match $10 into your 401K balance.

If company offer no match, I advise as priority to contribute to ROTH IRA to maximum of $5000 as of 2008.  ROTH is tax free (including gains from investment) when you withdraw at your retirement.  And if you can afford to contribute more money into retirement, add the rest into 401K.

Answer 4

They are similar, but not identical. An IRA is a retirement account that you contribute money to. A 401k is an account that is sponsored by your employer. The employer usually matches part of your contribution.

For either plan, you need to be employed.

Under certain circumstances, an IRA is tax deductible and the money grows tax deferred until you reach age 59 1/2. After that, withdrawls are taxed as regular income. 401k contributions are made with before tax dollars and are also tax deferred.

Another type of IRA is a Roth IRA. These contributions aren't deductible, but after age 59 1/2, with drawls are tax free.

Either type of account is good. If you're young enough, it will only take $25 or $30 a week to grow into a sizeable retirement account.

Answer 5

Long story, short--do as much as you can in this order:  

1)  Contribute at least as much to your 401k as your employer will match.  The company match is free money, and is usually a guaranteed 50-100% return on your money depending on the plan.

2)  If you have money leftover, consider opening a Roth or Traditional IRA, and contribute as much as you can up to the allowable limit.  (Talk to a tax-advisor to find out which makes more sense for you).

3)  If you still have money leftover, max out your 401k to the allowable limit.  Human resources can help you determine how much to put in.  

4)  If you still have money left to invest, and you are out of tax benefits, invest in a taxable account as well.

Don't forget to live, but keep in mind that the sooner you get started, the more interest you will make, and the fewer years you will have to work.  Don't get stuck working in your 60's or 70's just because it is what your parents and grandparents did.