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401(k) vs. IRA: Where to Put Your Money header image

401(k) vs. IRA: Where to Put Your Money

Of course saving for retirement is important for your financial security, but choosing the best way to do that can be confusing. Vehicles like IRAs and 401(k)s offer tax savings and benefits for long-term savers, but which fund allocation strategy is best for you?

How to Allocate Your Funds

The Differences Between a 401(k) and an IRA

The primary difference between the two accounts is that 401(k)s are offered only through employers who choose to offer them, while any individual can open an IRA account through a bank, a brokerage firm or an insurance company.

The good news is that you may be able to contribute to both a 401(k) and an IRA. If you’re employed by a company that offers a 401(k), you can contribute to it. If you have earned income and are below the age of 70 1/2, you can also contribute to a traditional IRA.

The Power of Matching Funds

The first step to deciding how to allocate your money is to find out whether your employer offers a 401(k) — and whether they will match your contributions. If the answers are yes to both, you’ll likely want to take advantage of that before doing anything else — it’s essentially free money from your employer. Contribute enough to the 401(k) so you’ll get the maximum match your employer offers.

If you want to invest additional funds, the next step is to open an IRA — either a traditional or Roth. A traditional IRA can offer an immediate tax break; depending on factors like your income and contributions to a 401(k), the contributions may be deductible. A Roth IRA might be a better choice if you can’t deduct traditional IRA contributions or if you’d prefer tax-free withdrawals during retirement over deductions now. However, take note: your income has to be below a certain level to contribute to a Roth.

After you max out your contributions to the IRA, if you still have money to set aside, return to the 401(k) and fund that to the extent allowed. Those accounts have a higher maximum contribution level than IRAs: The contribution limit for 2020 is $19,500 ($26,000 if you’re 50 or older), while the limit for most IRAs is $6,000 ($7,000 if you’re 50 or older).

When to Start With an IRA

If your employer doesn’t offer matching funds for a 401(k), it may be best to allocate your funds toward an IRA and contribute as much as you can, to the allowable limit. The IRA’s benefits include access to more investment options than most 401(k)s offer, giving you more control so you can diversify as you wish. You’ll also avoid the administrative fees that many 401(k)s charge.

Once you fully fund the IRA, turn to the 401(k), if your employer offers one, and put your money there. Even without matching funds from your workplace there are benefits: Most importantly, contributions to a 401(k) will lower your taxable income for the year, so it’s still a good place to invest.

Secure Your Financial Future

Many factors affect retirement planning; Farm Bureau is here to help. Talk to your Farm Bureau agent or financial advisor today to get started securing your financial future.


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