Ask an Expert: 401k, IRA or Both?
Dear Kirk: Should I have both an IRA and a 401k? And what happens to my 401k if I change jobs?
Kirk Says: Let’s start with the understanding that both the IRA and the 401k are qualified plans that typically behave the same way in regards to tax advantages and requirements. One thing to consider beyond these is the Roth IRA, which gives you some diversity, as opposed to the traditional IRA or 401k when it comes to the tax treatment of the money. In my opinion, the notion of having both an IRA and a 401k should be replaced by having a Roth IRA and a 401k. And that being the case, the answer there is yes, you should have both.
Let’s explore the benefits of the most common 401k plans. These typically have an employer match—this is free money to you. Let’s say your employer’s plan has a dollar-for-dollar match up to 3 percent and your annual salary is $50,000. So if you contribute 3 percent, which is $1,500, then your employer is going to match that with an additional contribution of $,1500. And as an added bonus, your tax bill will be reduced by your tax rate times the same $1,500. So how about a “cheers” to our federal government giving us such a tremendous tax break?