The company I work for does not match IRA contributions, should I still invest there and get the pre-tax savings or go to the open market and get my own?
Financial advice is best suited to IMHO.
Colibri
General Questions Moderator
It depends on the fees and investment options provided at work, and whether they are better or worse than what you can get on your own.
its handy to have automatic paycheck deduction – you don’t miss what you never see – but if the terms are poor (high costs and fees, poor investing options) you’re better off on your own and setting an automated withdrawal from your bank account.
Edit: sorry the above is true if you make a nationally average income. The tax benefits still apply to IRAs if you make 60k or less.
We really can’t answer this question with more information. It’s like saying “I’m near a river. How do I get to Las Vegas?”
Your can contribute to a IRA exists at any income level, but the contributions are only tax-deductible when you are below certain total levels of income (which vary based on filing status, coverage under an employer plan, etc). Even then, your contribution limits are pretty low 5500 or 6500, depending on your age.
Since most employer plans offer something more than 12,000 range for deferral contributions (as much as 22,500 for 401k plan participants under the catch up provisions), that’s clearly the ticket if you want to make larger contributions. And the fact that you can contribute regardless of other income makes it better for high earners.
So… that’s the tax end of it, but still not the whole picture…
You also have to look at the investment options, fees, advice, etc. that are available. Many employer plans restrict you to certain fund families or certain allocations, but these restrictions are designed to cost you less in certain investing fees by grouping the employers’ assets together. Still, you might be able to find investments with lower fees by going elsewhere.
First, don’t confuse the terminology.
Your company does not match 401k contributions (or 403b if a non-profit)
You can still choose to contribute to it, or you can contribute to an IRA, up to 5500-6500/yr.
If you make <$61,000/yr single or <$98,000/yr married filing jointly, the tax treatment is going to be the same, that is, both are fully tax deductible. If you make more than that, you shouldn’t even consider an IRA.
If you make less than those figures, IMO you should max out an IRA (and if you want to contribute more, put the rest in your 401-k). I’ve never seen a 401-K where they could beat the lowest costs funds available in an IRA, and many where all the choices had outrageous fees. In an IRA, you can go with any broker, and you have basically the entire universe of investment choices - from the lowest of low cost funds to individual stocks to even Forex or options if you want.
+1 on almost all of this.
IRA versus 401(k) benefits / recommendations can vary a lot depending on the individual circumstances.
If the OP were to contribute to a Roth IRa versus a 401(k), there’s a higher current tax burden, but then no future tax burden - ever. So if you’re earning 50K a year now, but have reason to believe your salary will increase a lot later and you’ll have a lot of retirement savings, it might be worth biting the tax bullet now at a lower percentage.
You could max out the 401(k) and save in an IRA (post-tax savings, most likely) if you have the spare cash.
It may be easier to save in the 401(k) because you never actually get your hands on the money (versus an IRA where you do, and have to make the contribution yourself).
401(k) plans also often (usually?) offer the ability to borrow against them, though that poses its own risks. You cannot borrow against an IRA.
If you do go with the 401(k) now, you can always move it to an IRA when/if you change jobs.
And if you make too much for a Roth IRA, you can pull a backdoor Roth maneuver. Although that can get complicated if you have a traditional IRA.
Roth (post-income tax) and traditional (pre-income tax) plans are available on both platforms (401k and IRA) so Roth IRA is a red herring. 401k is employer sponsored and not all plans offer Roth 401k, but they’re extremely common.
The biggest difference between IRA and 401k plans is the maximum contribution per year (as dracoi pointed out) and granular control over your funds. 401k accounts allow much higher annual contribution. IRA accounts give you the ability to buy individual stocks, bonds, mutual funds and ETFs. They’re not really any different from a brokerage account from a trading perspective. You can contribute to both without affecting the maximum of either.
With no employer contribution, I would say fund your personal IRA to the limit before contributing to your company sponsored 401k plan, simply because you have more control over it. Then again, some people prefer to choose from a menu of balanced plans offered by the fund management company their employer chooses. This isn’t at all unreasonable.
The bottom line is that there’s only so much money you can put into tax advantaged retirement funds. You’re not at a disadvantage from using the 401k if you’re comfortable with the investment options offered. A starting IRA isn’t going to get you a lot of personal attention so you have to be comfortable at some level with managing your own money. You have two buckets and you can fill some, none or all of both of them with pre-tax or post tax dollars.
Ask 10 people how they do it and you’ll probably get at least 12 answers