Money Talks, So Should You

Q&A: What are the differences between a 401(k) and an IRA?

Steve Doster
by Steve Doster, The Garrett Network  (@dosterfinancial)

The biggest difference is that a whole bunch more money can be contributed to a 401(k) than an IRA. The 2013 limit in the 401(k) is $17,500 ($23,000 if age 50 or older) while you can only contribute up to $5,500 into an IRA ($6,500 if age 50 or older).

A big advantage of saving in a 401(k) is that you’ll probably score some free money in the form of an employer match. Don’t ever pass up free money…as long as it’s legal.

Another difference is that 401(k) contributions can always be tax-deductible regardless of how much money you make. That’s not true for an IRA. If you make too much, then the money you put into an IRA can’t be deducted from your taxes. Don’t ask how much money is too much. The IRS made it very complicated. Just do a web search for “IRA deduction limits” to find out.

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An IRA is favorable over a 401(k) in terms of investment choices. That’s because an IRA can be opened at any discount brokerage firm (think TD Ameritrade, E-Trade, Scottrade, etc.) allowing you to select from thousands of mutual funds and stocks. That’s much better than being limited to a dozen mutual funds offered in the typical 401(k) plan.

But don’t let the limited investment choices stop you from contributing to your company 401(k). Try to put in the maximum amount in the 401(k) and get the full employer match. When you eventually leave the company, rollover that 401(k) money into an IRA to invest in no-load, low cost index mutual funds.


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Steve is president and founder of Doster Financial Planning, a commission-free firm based on San Diego, CA. He is a CERTIFIED FINANCIAL PLANNER™ professional with an MBA fom Arizona State University and a BS in mechanical engineering from the University of Arizona. Steve is proud to say he doesn’t sell financial products or earn commissions on the advice he provides to clients. His primary goal is to educate people to understand and select the best ways to achieve their unique financial future.