A 401(k) plan is something not every retirement saver has access to. And that's OK, because people who don't have the option to save in a 401(k) can instead build a nest egg in an IRA instead. The only requirement to fund an IRA is having earned income -- you don't need an employer's sponsorship or approval.
However, you may be in a position where you have the option to save for retirement in both an IRA and a 401(k) in the coming year. The question is, which long-term savings plan is the better choice? To figure out the answer, ask yourself these two key questions.
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1. Am I entitled to a 401(k) match from my employer?
Many employers that offer 401(k)s match worker contributions to some degree. If yours does, it pays to contribute enough money to your 401(k) to snag that match in full.
Beyond that, if you'd rather keep the rest of your savings in an IRA, go for it. But it's silly to give up free money when the option to claim it exists.
Remember, when you snag an employer match in your 401(k), that's more money you also get to invest. So let's say you're eligible for up to $3,000 in 401(k) matching dollars in 2024. By 2054, that $3,000 from your employer could be worth over $30,000 if your investments generate an average annual 8% return, which is a bit below the stock market's average.
2. Do I consider myself a hands-on investor?
One thing some people don't like about 401(k)s is that they don't allow you to choose individual stocks to put your savings into. Rather, you're generally limited to a variety of funds.
With an IRA, you can hand-pick stocks. So if that's something you're inclined to do, that's reason enough to choose an IRA over a 401(k). But if you're not really looking to educate yourself on investing, you may be just fine with the options in your 401(k).
In that case, you could put your savings into a target date fund, which will adjust your risk profile as retirement gets closer. Or, you could put your money into a broad market index fund. Because index funds are passively managed, their fees are usually quite low and reasonable.
It doesn't have to be one or the other
If you're still not sure whether your savings should go into an IRA versus a 401(k) plan in 2024, remember that you can contribute to both accounts. In fact, a good strategy is to fund your 401(k) up to the amount of your employer's matching incentive, but from there, put your remaining money into an IRA so you can assemble a more customized portfolio of stocks.
Either way, though, know this: A lot of people will, unfortunately, likely end up not adding to their retirement savings in 2024 due to a variety of circumstances. So if you're able to save something in any type of retirement plan, that's a very good thing right there and puts you ahead of the game.
