The good news is that you do not have to choose between the two. You are allowed to have both an Individual Retirement Account (IRA) and a 401(k), 403(b), or other employer offered retirement plan. However, should you be in the position where you can afford to participate in only one of these retirements plans, there are some things that you should consider.
First, an IRA has a ceiling for contributions each year. The ceiling changes with inflation but generally, the ceiling for an IRA is lower than the ceiling for a 401(k) or other employer offered retirement plan. As such, depending on how much money you are willing to save for retirement, you may want to choose the 401(k) or other employer offered retirement plan if you are willing to save more than the maximum amount allowed by an IRA.
Another factor that you should consider is whether or not your employer matches any of your 401(k) or other employer offered retirement plan contributions. If your employer does match your contributions (to whatever extent) this is the equivalent of free money. As such, if you save, for example, $4,000 for your IRA, that same $4,000 in a 401(k) or other employer offered retirement plan could be $5,500 or more based upon your employer’s contribution. As such, using our example, you will have made an additional $1,500 simply by investing your $4,000 in a 401(k) or other employer offered retirement plan instead of an IRA.
As for the availability of investments, both IRAs and 401(k)s or other employer offered retirement plans offer a myriad of investment options. As such, this factor should not weigh too heavily on your decision as to whether to get an IRA or a 401(k) or other employer offered retirement plan.
A big factor to consider is that a 401(k) or other employer offered retirement plan is usually not transferrable to other companies, and thus, you will have to work for that one particular company if you want to keep your 401(k) or other employer offered retirement plan. You are allowed to “rollover” your 401(k) or other employer offered retirement plan to an IRA, but you will not get the employer contributions should you do so. Therefore, if you do not plan on staying with a company for a long time, you may want to consider an IRA. Additionally, in order to contribute to an IRA you only need to have an income amount equal to or greater than your contribution to your IRA for that year. On the other hand, you need to be employed by an employer that offers a 401(k) or other employer offered retirement plan in order to participate in the same.
Truthfully, both products are great ways to plan for retirement. Whatever you do, make sure that you have at least one of these accounts open and working by the time you get a job or sooner, should you choose the IRA option.