Saving for retirement: 401(k), IRA, or both?

According to recent research, 31% of Americans have an individual retirement account (IRA) and 32% save in a 401(k) plan, making them among the most popular ways to save for retirement # . Both types offer tax advantages and feature similar treatment of contributions and distributions. But the two differ in many other ways. Below are summaries of their key features.

401(k)s

As employer-sponsored plans, 401(k)s are available only to employees of companies that offer them and may include length-of-service requirements before an employee can deduct contributions from their payroll checks. In many plans, the employer matches up to a certain percentage of the employee’s contribution.

401(k) plans offer generous contribution limits — up to $19,000 in 2019 and up to $25,000 if you are age 50 or greater. Total contributions, including any employer contributions, can be as high as $56,000 in 2019. Many plans also offer a loan feature that allows you to borrow against your vested account balance.

IRAs

You can open an IRA on your own, although the tax deductibility of contributions may be limited depending on your income and whether you or your spouse participates in a workplace plan such as a 401(k) (see below). You can contribute up to $6,000 to an IRA for 2019 plus an additional $1,000 if you are age 50 or older. Contributions for a given tax year can be made up to April 15 of the following year.

401(k), IRA, or both?

In general, if your employer offers a 401(k) plan, it’s a good idea to participate. If you do not have access to a 401(k), an IRA offers similar tax benefits, albeit with significantly lower contribution limits.

For many people, the question is not which one to choose, but whether you can contribute to both a 401(k) and an IRA. If you or your spouse participates in a 401(k) or other workplace plan, there may be limits to the deductibility of your contributions to a traditional IRA. Moreover, you may not contribute to a Roth IRA if your income exceeds certain levels.

Traditional IRA deductibility limitations: If you participate in a workplace plan and you make over $74,000 in 2019 ($123,000 for joint filers), you cannot deduct any of your contributions. If you don’t participate in a workplace plan, but you file a joint return with a spouse who is covered by an employer-sponsored plan, you cannot deduct your contributions to an IRA if your joint income is over $203,000 in 2019. There are no income limits to contribute non-deductible contributions to a traditional IRA.

Roth IRA income eligibility: You cannot contribute to a Roth IRA if your income exceeds $137,000 in 2019 ($203,000 for joint filers).

For a closer look at the differences between traditional and Roth IRAs, see Traditional or Roth: Which IRA Works Best for You.

Be sure you are familiar with the IRS rules and specifics of your plan before investing, and don’t hesitate to consult a financial professional for advice.

401(k)s vs. IRAs at a glance #

401(k)
IRA
Individual contribution limit (2019)
$19,000
$6,000
Catch-up contribution limit (2019)
$6,000
$1,000
Employer match
Yes, if offered by plan
No
Contribution deductibility (traditional)
Fully deductible (pretax)
Deductibility based on income, filing status and if covered under an employer plan
Traditional or Roth
Yes, if offered by plan
Yes
Tax treatment of distributions
Tax-deferred (pretax) or tax-free (after-tax/Roth)
Tax-deferred (pretax) or tax-free (after-tax/Roth)
Availability
Through employer
Through bank or other financial service provider
Ownership
Vesting period may be required for employer contributions
Immediate
Loans from account
Yes, if offered by plan
No
Required minimum distributions
Yes, if 401(k) or traditional IRA; no, if Roth IRA
Yes, if 401(k) or traditional IRA; no, if Roth IRA

Please refer to our Terms & Disclosures

 

Brokerage and investment advisory services offered by UnionBanc Investment Services LLC, an SEC-registered broker-dealer, investment adviser, member FINRA / SIPC, and subsidiary of MUFG Union Bank, N.A. Insurance services offered by UnionBanc Insurance Services, a division of MUFG Union Bank, N.A., having a California domicile and principal place of business at 1201 Camino Del Mar, Suite 208, Del Mar, CA 92014. California State Insurance License No. 0817733. Non-deposit investment and insurance products: • Are NOT deposits or other obligations of, or guaranteed by, the Bank or any Bank affiliate • Are NOT insured by the FDIC or by any other federal government agency • Are subject to investment risks, including possible loss of the principal amount invested • Insurance and annuities are products of the insurance carriers.

 

Clients requiring banking services will work directly with bankers from MUFG Union Bank, N.A. Bank products available through MUFG Union Bank, N.A. are FDIC-insured within permissible limits.

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