The 401 (k) is simply objectively better. Both 401 (k) plans and IRAs have valuable tax benefits, and you can contribute to both at the same time. The main difference between 401 (k) and IRAs is that employers offer 401 (k) plans, but people open them (using brokers or banks). IRAs tend to offer more investments; 401 (k) allow for higher annual contributions.
But despite how positive all of this is, there are good reasons to have an IRA in addition to your 401 (k). An IRA not only gives you the ability to save even more, but it can also give you more investment options than you have in your employer-sponsored plan. And if you have a Roth IRA, there's also a chance to earn tax-free income in the future. Yes, you can have both accounts and many people have them.
The traditional Individual Retirement Account (IRA) and 401 (k) offer the benefit of tax-deferred retirement savings. Depending on your tax situation, you may also be able to receive a tax deduction for the amount you contribute to a 401 (k) and IRA each tax year. A 401 (k) is a better option than an IRA if you want to invest more for retirement and aren't too picky about investment options. Most plans are limited to the securities (such as stocks and bonds) chosen by the employer.
When you think about saving for retirement, the two most common accounts that can arise are usually a 401 (k) or an IRA. If you have a 401 (k) plan at your workplace, you can also open and annually fund a traditional IRA or a Roth IRA (the latter, depending on your income level). If your 401 (k) plan has limited investment options, consider opening a traditional or a Roth IRA and contributing to the annual maximum. The contribution limits of the Roth IRA and Roth 401 (k) are the same as those of non-Roth entities, but the tax benefits are different.
While both are great retirement account options, the biggest difference between a 401 (k) and an IRA is that you only contribute to a 401 (k) through your employer. Since you need to make contributions on your own, consider setting up automatic transfers so you can contribute money to your IRA account each month and increase your retirement savings. Depending on the type of IRA you choose, Roth or traditional, you can get your tax relief now or in the future when you start withdrawing funds for retirement. While the tax deductibility of traditional IRA contributions may be limited or prohibited, combining these accounts can increase your retirement savings over your years of work.
These plans share similarities in that they offer an opportunity to save tax-deferred (and, in the case of the Roth 401 (k) or Roth IRA, to earn tax-free profits). If your income exceeds certain thresholds, you may not be eligible to contribute to a Roth IRA at all. A Roth 401 (k) plan, similar to a Roth IRA, allows you to make after-tax contributions so you can withdraw the money tax-free when you retire. A Roth IRA is a good option if you don't qualify to deduct traditional IRA contributions, or if you don't mind giving up the immediate IRA tax deduction in exchange for increasing your investments without taxes and tax-free withdrawals when you retire.
Earned income is a requirement to contribute to an IRA, but a spousal IRA allows a working spouse to contribute to an IRA for their non-working spouse, allowing the couple to double their retirement savings. Again, the tax-deferral benefit of a business-sponsored plan is a good reason to allocate money to a 401 (k) after you've funded a traditional or Roth IRA. This is because withdrawals from a traditional IRA are taxed at ordinary income tax rates at the time of the withdrawal; qualified Roth withdrawals, as I mentioned, are tax-exempt. .