Is an IRA a Better Savings Options for Retirement?

by | Jul 15, 2021 | WWC WorthWhile Reading

Last week we discussed how much to contribute to your 401(k), but what if you have additional discretionary income or not match? Do you add it to your 401(k) or an IRA?


If you are already contributing up to your employer match, a way to invest additional cash is through a traditional or Roth IRA. (And if you have no employer match, start with the IRA.) The IRA contribution limit is much lower — $6,000 in 2021 ($7,000 if age 50 or older) — so if you max that out but want to continue saving, go back to your 401(k).


Some 401(k) plans, have access to investments with very low expense ratios. That means you’ll pay less through your 401(k) than you might through an IRA for the very same investment.  But working with an Fee-Only, Certified Financial Planner™ professional may help you invest through an IRA with lower expense ratios. And because 401(k) plans offer limited investments, you’re limited to what’s available.


Let’s be clear: While fees are a bummer, matching dollars from your employer outweigh any fee you might be charged. But once you’ve contributed enough to earn the full match — or if you’re in a plan with no match at all — the decision of whether to continue contributions to your 401(k) is all about those fees.  If the fees are high, direct additional dollars over the match to a traditional or Roth IRA.


401(k), IRA, Roth: Know the tax impact

  • Traditional 401(k) or Traditional IRA – your contributions come out of your paycheck pretax, but distributions in retirement are taxed as income. That means your money grows tax-deferred.
  • Roth 401(k) or ROTH IRA, your contributions are made after tax but distributions in retirement are tax-free — you never pay taxes on investment growth.


If your employer doesn’t offer a Roth version of a 401(k), you may want to start contributing to a Roth IRA after you’ve achieved your 401(k) match, to build some of that tax-free income in retirement.


In general, money contributed to a Roth account is more valuable in retirement, because you’re not handing a portion of every distribution to the IRS.


If you max out that Roth IRA and need to continue saving, go back to the 401(k) and continue contributions there.


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