An IRA not only gives you the ability to save even more, but it can also give you more investment options than you have in your employer-sponsored plan. And if you have a Roth IRA, there's also a chance to earn tax-free income in the future. Both 401 (k) plans and IRAs have valuable tax benefits, and you can contribute to both at the same time. The main difference between 401 (k) and IRAs is that employers offer 401 (k) plans, but people open them (using brokers or banks).
IRAs tend to offer more investments; 401 (k) allow for higher annual contributions. No control over plan and investment costs Once you get the balance, consider exhausting your IRA for the year, returning to 401 (k), and resuming contributions there. A Roth IRA is a good option if you don't qualify to deduct traditional IRA contributions or if you don't mind giving up the immediate IRA tax deduction in exchange for increasing your investments without taxes and tax-free withdrawals when you retire. Depending on the type of IRA you choose, Roth or traditional, you can get your tax relief now or in the future when you start withdrawing funds for retirement.
Every investor should review an investment strategy for their particular situation before making any investment decision. If the participant has an established Roth IRA, the qualification period is calculated from the initial deposit in the IRA and the reinvestment will be entitled to tax-free withdrawals when that 5-year period ends (and the age requirement has been met). In addition, the balance of a Roth 401 (k) can be transferred directly to a regular Roth IRA upon leaving the employer, thus circumventing RMD rules. Roth IRA account conversions require a 5-year retention period before earnings can be withdrawn tax-free, and subsequent conversions will require their own 5-year retention period.
NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell certain stocks, securities or other investments. If you don't have access to an employer-sponsored plan, such as a 401 (k) plan, or if you're already contributing up to the annual limit, a traditional or Roth IRA can help you increase your retirement savings. The information provided here is for general information purposes only and should not be considered an individual recommendation or personalized investment advice. If you expect to be in a higher tax bracket, a Roth IRA may make more sense and has other advantages compared to a traditional IRA and 401 (k), including the absence of taxes on accumulated earnings from your investments.
Alternatively, you can make a contribution to a non-deductible IRA and then change it and convert it to a Roth IRA. When that's the case, choosing an IRA and contributing to the maximum is generally a better first option. Before making a decision, be sure to understand the benefits and limitations of the available options and that you consider factors such as differences in investment-related expenses, plan or account fees, available investment options, distribution options, legal and credit protections, the availability of credit provisions, tax treatment, and other concerns specific to your individual circumstances. This information is not and is not intended to be a substitute for specific individualized tax, legal or investment planning advice.