Comments on: What’s the Difference Between a 401(k) and an IRA? Which is Better?

By: Syed

Syed — Thu, 29 Sep 2016 20:00:12 +0000

Great overview Erin! I feel that unless you’re in the 10% tax bracket, you should be contributing as much as you can to your 401k plan if it’s a decent one. The match is nice of course, but what really moves the needle is contributing more and letting compound interest do its thing. Tax savings and compound interest are a powerful combination.

The other thing I like about 401k contributions is that they are usually taken out of your check automatically. This is the best system to have set up because it prevents you from wasting the money otherwise.

By: Fruclassity (Ruth)

Fruclassity (Ruth) — Thu, 29 Sep 2016 10:06:35 +0000

As a Canadian, I’ve always compared the American 401(k) to our RRSPs and the IRA to our TFSAs. I wasn’t clear on the difference between traditional and Roth IRAs. Now I am, so thanks for that! I like the international flavour of pf blog posts. There are subtle and not-so-subtle variations from country to country.

By: Josh

Josh — Tue, 27 Sep 2016 22:02:53 +0000

I miss my employer-sponsored 401k. It’s worth contributing the minimum to get any qualifying match. I also invest in a Roth IRA, that way I can choose direct stocks or funds that are not part of the 401k basket.

By: Kalen Bruce

Kalen Bruce — Tue, 27 Sep 2016 13:22:53 +0000

Hey Erin,

Great write-up! You covered most of the bases, but like you said, it’s personal for everybody and every situation. It’s impossible to cover every situation in one article, but I think you came as close as you can!

Like the majority, I recommend a Roth IRA for young people, since the growth will likely well exceed what you put in at a young age. Of course, this is assuming you are putting it in growth investments. If it sits in a money market account, it won’t really matter because there isn’t going to be much, if any, growth. I see this all the time with the Thrift Savings Plan (TSP), which is the 401k equivalent for federal employees. Since the new Roth TSP was introduced, everyone is flocking into it; however, the majority of people are leaving it in the government-secured fund that it automatically deposits your money into — basically a savings account. So they’re surprised to see that in 10 years, they’ve had little to no growth.

Do your research as far as investment options and make sure your money is actually growing. I can’t stress this enough. As long as people actually do the research, I recommend putting enough in your 401k to get the match (if there is one), and then maxing out your IRA (since you have way more options for investment), and finally maxing out your 401k once your IRA is maxed out.

Also, don’t forget that stay-at-home spouses can contribute to an IRA. As long as you file a joint tax return, a stay-at-home spouse can contribute the same as an employed person can. Take advantage of that — that’s double the contribution limits!

So my personal suggestion is usually this:

1. Put enough in your 401k to get the full match
2. Max out your IRA (Roth general preferable)
3. Max out your 401k

If you’ve done that, you should be sitting pretty! Make it as far down the list as you can. That’s just my two cents!

Cheers,
Kalen

By: Financial Panther

Financial Panther — Mon, 26 Sep 2016 19:52:23 +0000

I would note that, if you’re young but expect to make a high household income in the future (young lawyers, medical residents, etc.), you might want to reconsider funding an IRA. The reason being that those of us with high household incomes in the future can’t fund a Roth IRA directly, and will need to keep IRA space open in order to utilize a backdoor Roth IRA.

For myself and my fiance, we do not fund any IRAs, simply because we will have a high household income and want to keep the flexibility of being able to contribute to a backdoor Roth if we decide. Probably beyond the scope of this post, of course, but just thought it’d be a nice reminder for millennials early in their careers that expect to make much more later.

By: Fehmeen

Fehmeen — Mon, 26 Sep 2016 17:38:39 +0000

I think another advantage a 401k has is that it is fully protected from bankruptcy claims by creditors compared to an IRA which has a protection cap of about $1 million.

By: Erin

Erin — Mon, 26 Sep 2016 17:35:53 +0000

In reply to Amanda @ centsiblyrich. That sounds like a great strategy, Amanda!