IRA, 401(k), or Both? Which Retirement Accounts Are Right for Me?

Apr 24, 2014 10:25:14 AM / by Jason Shaw


retirement planning

Choosing a retirement account is no simple matter.  Each type has its own benefits and drawbacks, and how those affect you depends upon your individual financial situation.  A qualified financial services professional is best able to help you make the most advantageous choice based on your unique circumstances.  It is helpful, however, to understand the basic differences among the most common types of retirement accounts and which are the best fit for your savings.  Having this foundational knowledge before you meet with a financial planning professional will help you to work with your advisor to develop a strategy that you fully understand and in which you have confidence.

What Are My Choices?

If your employer offers a 401(k) plan, check the plan’s eligibility requirements.  Often, employees are eligible to participate only after a certain period of employment, but this is generally limited to one year.  The exclusion period may be as long as two years if, after that time, participants are 100% vested in all balances.  If you’re under 21, you are off to a great financial planning start by reading this now!  However, you may be excluded from contributing to your employer’s 401(k) at this time.

If you are under the age of 70 ½ and earn taxable income, you may contribute to a traditional IRA.

Roth IRAs are available only to those below certain income limits.  Married couples earning at least $228,000 and singles whose income is $153,000 or more may not contribute in 2023.  You may contribute to a Roth IRA at any age, but only if you earn taxable income.

Which of My Choices Is Best for Me?

The answer to this question depends on your available choices, income level, age, expected income level in retirement, and the likelihood that you will need the funds before you reach retirement age.


If you are eligible for an employer-sponsored plan such as a 401(k), this is almost always the best choice for receiving top priority.  This is largely because many of these plans offer matching employer contributions (up to certain limits), making them extraordinarily effective savings tools.

Be sure to read your plan’s specific provisions.  Some employers offer 401(k)s without matching any employee contributions.  If this is the case, or if you can afford to contribute more than your employer will match, you will want to carefully study the plan’s provisions to compare its benefits to those of an IRA.  Often, the fees associated with a 401(k) are larger and less transparent than those attached to an IRA and may make it a less attractive choice.

If you choose to contribute to a 401(k), you will be subject to some limits.  The IRS reports that in 2023, participants may contribute only the amount of his or her compensation from the sponsoring employer or $66,000 ($73,500 if 50 or older), whichever is lower.  The amount of your contribution that is tax deductible is limited to $20,500 ($28,000 if 50 or older).

You should also limit 401(k) contributions to what you can reasonably afford to live without until retirement.  While IRAs allow withdrawals at any time, 401(k) withdrawals before age 59 ½ are subject to a 10% penalty in most circumstances.

Traditional IRA

IRA contributions are much more limited.  You can contribute up to $6,500 ($7,500 if 50 or older) in 2023 or the total of your taxable compensation for the year, whichever is lower.  If you are not eligible for a 401(k), or if funds you have available for contribution are not matched by your employer, this may be a good alternative for you.  Contributions to a traditional IRA are tax deductible but taxable upon withdrawal.  If you are currently earning an income that puts you in a higher tax bracket than you expect to be during your retirement, then this is an advantageous feature.

Roth IRA

The limits on contributions to a Roth IRA are the same as for a traditional IRA.  The primary difference is that Roth contributions are not tax deductible, but withdrawals in retirement are tax-free.  This can be a great benefit to workers who are in lower tax brackets now and are paying little or no federal tax.  Putting earnings into a Roth IRA allows money earned now to grow and be used later without being subject to tax.

The choice of retirement accounts is best made in consultation with a financial professional who has a thorough understanding of your financial picture.  Boelman Shaw Tax & Financial Planning offers a full range of financial services, including retirement and other financial planning, tax planning, and business services.  We have the advantage of being able to fully acquaint ourselves with our client’s financial lives to give them the most appropriate advice for their unique circumstances.

Tax and accounting services provided through Boelman Shaw & Company, LLC. Advisory services provided through BSC Capital Partners, LLC a state of Iowa registered investment advisor.

Topics: Retirement

Written by Jason Shaw