September 19, 2022
When it comes to building wealth, the best thing you can do is start early and contribute as much money as possible.
But with so many different retirement savings options available, it can be difficult to know where to put your money. Should you open a 401(k) through your employer? Or would an IRA be better for you?
To help you decide, let’s take a look at how 401(k)s and IRAs work, and the pros and cons of each.
A 401(k) is a retirement savings plan sponsored by an employer. It’s a great way to save for retirement because it offers several advantages.
For one, 401(k)s have much higher contribution limits than IRAs. In 2022, 401(k)s have a contribution limit of $20,500, while the limit for IRAs is $6,000.¹
This means you can potentially save a lot more money in a 401(k) if you have income to spare.
Another advantage of 401(k)s is that many employers offer matching contributions. This is free money that your employer contributes to your retirement. It’s a great way to supercharge your savings.
But don’t write off IRAs just yet—they have some advantages of their own.
For one, you don’t need an employer to open an IRA. This makes them a great option if you’re self-employed or if your employer doesn’t offer a retirement savings plan.
IRAs also give you a lot more control over your investments than 401(k)s. With a 401(k), you’re limited to the investment options offered by your employer.
With an IRA, you can choose from a wider range of investments, including stocks, bonds, and mutual funds. This can potentially help you earn a higher return.
So, which is better—a 401(k) or an IRA? The answer depends on your individual circumstances.
If you have a 401(k) through your employer, it’s generally a good idea to contribute at least enough to get the employer match. After that, you can consider contributing to an IRA as well.
If you don’t have a 401(k) or if you’re self-employed, an IRA may be the better option for you.
No matter which type of account you choose, the most important thing is to start saving for retirement now. The sooner you start, the more time your money has to grow.