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IRA or 401(k)? The Best Answer Might be Both

  • Matt Bell
  • 2018 4 Jun
IRA or 401(k)? The Best Answer Might be Both

"If I'm eligible to contribute to both an IRA and a 401(k), which should I choose and why?" The question is a common one. The answer depends on a number of factors that we'll explore in this article.

Before you can make a good decision about which retirement-funding vehicle is best for you, be sure you're truly ready to invest. The prerequisites: using a household budget; carrying no debt other than a reasonable mortgage; and having an emergency fund able to cover three to six months' worth of essential living expenses.

Assuming these steps have been taken, the next step is to determine how much to contribute to a retirement plan. At very least, use a simple calculator such as Fidelity's myPlan Snapshot for some ballpark figures.

Let's say you decide to set aside 10% of your income for retirement. Now you're ready for the 401(k) vs. IRA decision.

The first question that will help you make the best decision is whether your employer offers a match on a portion of what you contribute to a 401(k) plan. If so, that's the easiest money you'll ever make, so don't miss out! In a common scenario, an employer may contribute 50 cents or a dollar for every dollar you contribute up to 6 percent of your salary.

You could choose the most conservative investment option available in your plan (not that we advise doing so) and still be guaranteed a 50% to 100% return on your money! So if a match is available, contribute the full amount eligible for the match. In the above scenario, that would be 6 percent of your salary.

What about the remaining 4 percent that you plan to invest? In most cases, we suggest putting the money in an IRA. First though, you need to make sure you are eligible to contribute to an IRA.

No income restrictions exist regarding who can contribute to a 401(k), but there are restrictions on who can contribute to an IRA, especially if you are covered by a workplace plan (you are considered to be covered if either you or your employer contributes to the type of plans we've been discussing, or you are eligible to participate in a defined-benefit/pension-style plan).

Here's the current rule: If you are covered by a workplace plan, a fully-deductible traditional IRA contribution is allowed for married people filing jointly only if their 2014 modified adjusted gross income (MAGI) is $96,000 or less. For single people, the MAGI has to be $60,000 or less. The amount of the contribution phases out at higher incomes, and it completely disappears for married couples filing jointly with an MAGI of $116,000 or more and for singles with an MAGI of $70,000 or more.

A Roth IRA has no restrictions tied to participation in a workplace retirement plan, but there are income-related restrictions. To qualify, your modified adjusted gross income (in 2014) needs to be less than $181,000 if you are married and filing jointly, or less than $114,000 if you are single. Here, too, there is a phase-out provision, with eligibility completely phasing out for married couples filing jointly with MAGI of $191,000 or more, and for singles with MAGI of $129,000 or more.

Assuming you qualify, the primary reason to switch from a 401(k) to an IRA for additional retirement savings is flexibility. An IRA offers virtually unlimited investment choices, whereas a 401(k) typically offers relatively few.

If your workplace plan does not offer a match, the decision is even easier. Start with an IRA for the reasons mentioned above. However, you may not be able to contribute as much as you'd like to.

The IRA contribution limit for 2014 is $5,500, with an additional $1,000 "catch-up" amount allowed for anyone age 50 or older. Naturally, you can—if you're married—effectively double these amounts by opening IRAs for both you and your spouse. But if you max out your IRA options and want to invest more, you can then turn to your 401(k) plan, where the contribution limits are far more generous. In 2014, 401(k) plan participants (as well as participants of 403b plans, which cover non-profit employees) can contribute $17,500. Those over age 50 may add another $5,500.


As you can see, the decision of whether to utilize a 401(k) plan or an IRA is not necessarily an either-or proposition. Both are excellent tools to help you reach your retirement goals, and they can be used quite effectively in combination.

Matt Bell is Associate Editor at Sound Mind Investing. Since its founding by Austin Pryor in 1990, SMI has been providing clear, trustworthy, effective investment guidance to the Christian community. Some 10,000 subscribers look to its flagship publication, the Sound Mind Investing monthly newsletter, for biblical guidance on a range of financial issues and specific investment advice. Matt is also the author of four personal finance books published by NavPress. He speaks at churches, on college campuses, and at other venues throughout the country. Contact him at

Publication date: June 2, 2014