401(k) and IRA Benefits and Drawbacks

I am an Elite IRA Advisor with Ed Slott & Co (Ed is a CPA and is known nationally as a IRA Pro). This is one of those pieces I found on Ed’s website (that I have updated for 2017) on this topic.

There is a frequent belief that if you’ve got a 401(k) program in which you work and you also contribute to it, you are not permitted to also contribute to your IRA for the identical year. But that is not true; you are permitted to contribute to the two.

So far as IRA or Roth IRA contributions proceed, for 2017, the maximum which you may contribute is $5,500 if you are under age 50 or $6,500 if you are age 50 or older this year. By way of instance, let us assume you are age 60, working this season, and eligible to contribute the entire $6,500 to a Roth IRA. If you decide to just contribute $4,000 to your Roth IRA, you can opt to contribute the remaining $2,500 to your IRA, bringing the total to $6,500.

Let us also assume that you have a 401(k) program in which you work. The maximum 401(k) contributions (also referred to as salary deferrals) you can make for 2017 are $18,000. If you’re age 50 or older and your plan permits, you may even create catch-up contributions of an additional $6,000, making your total 401(k) contributions $24,000. Oftentimes, 401(k) programs have some plan-based restrictions on salary deferrals that might lessen the maximum dollar amount you’re able to actually save. By way of instance, your plan might have to limit your salary deferrals to maneuver certain IRS nondiscrimination tests.

The biggest limit really is just how much money you can afford to contribute. If you are able to manage to contribute the maximum to either your 401(k) and IRA to get 2017, then you’re able to contribute a total amount of $23,500 ($5,500 + 18,000) if you are under age 50 or $30,500 ($6,500 + $24,000) if your age 50 or older.

Investors may have both a 401(k) and an individual retirement account (IRA) in precisely the exact same time, also it is quite common to have both kinds of accounts. These programs share similarities in that they offer you the opportunity for tax-deferred savings, or in the event of the Roth 401(k) or Roth IRA, gross profit savings. However, depending upon your individual situation, you may or might not be eligible for tax-advantaged contributions to both of these accounts in any given tax year.

If you (or your partner, if you are married) have a retirement plan at work, your tax deduction for a traditional IRA might be limited — or you might not be entitled to a deduction — depending upon your modified adjusted gross income (MAGI). to get an IRS graph to inform you in which you stand.

A 401(k) retirement savings program is offered to workers by several companies; it has substantial contribution limits, and in certain situations, an employer-matching contribution for people who participate. If your organization matches contributions, contributing enough to receive the entire employer match should always be the first step. Otherwise you’re leaving free money on the table.

Investments are limited to the options provided by the strategy. While many companies go to great lengths to expand the diversity of their capital provided, a few 401(k) programs are still hindered by limited investment choices, high-cost fund options and poor actors.

For 2015 and 2016, the total amount of income it is possible to defer is $18,000, with a possible additional contribution of $6,000 if you are age 50 or more. Your strategy may restrict contributions to a lesser amount.

Stocks, bonds, mutual funds and ETFs are all eligible for IRAs, which makes finding a cheap, solid-performing option simple. But, annual contributions are limited from the IRS.

An extra feature of IRAs is that the tax deductibility of contributions, however as discussed previously, the deduction is only permitted if an individual meets certain modified adjusted gross income (MAGI) requirements.

Neither consideration is necessarily better than another, but they all provide different capabilities. Broadly speaking, 401(k) investors must invest at least enough to make the complete matching contribution provided by their companies. Beyond this, the quality of investment choices might be a deciding factor.

If 401(k) investment options are somewhat bad, investors might wish to consider directing additional retirement savings toward an IRA. It can return to investor taste, but equally 401(k)s and IRAs are available to most individuals with earned income. Those earning more — or even people in which the citizen or his/her partner participate in a retirement savings plan in the office — might have limitations on tax-deductible contributions to an IRA. Check with your tax advisor for additional advice and where you need to invest.

 

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