IRA vs. 401(k): Which One is Right for You?

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Last updated December 8, 2020

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IRA vs 401k
October 28, 2016

Simple. Thrifty. Living.

As you plan for retirement, you might be thinking about opening an account that will help you save money for that period of your life. However, you come across the same question that most of us end up debating: IRA vs. 401(k). And if you’re not exactly adept at investing your money yet, you might not know how to choose between these options. You deserve to have some peace of mind when it comes to the account you’re putting your money in years before retirement, so before you make your decision, take a look at how a 401(k) differs from an IRA.

The difference between these two retirement options is all in the details. To start, you can typically only open a 401(k) account through an employer, while anyone who meets a few simple requirements — such as having earned income below a certain amount — can open an IRA. In addition, the maximum contribution limits for an IRA vs. 401(k) are different, as are the investment choices, since you have fewer options of where to invest your money when you open a 401(k). If you’re still trying to decide between an IRA and a 401(k), learning the details about the contribution limits and income limits for both can help.

Deciding on a 401(k) is easy; you just sign up through your employer. But if you are looking to open an IRA, the decision can be a little more difficult with so many options out there.

Best IRA Overall: Wealthfront

Wealthfront is always our No. 1 choice when it comes to automated investing, which makes it a great choice for your retirement IRA. Wealthfront’s automated system adjusts your investments for you based on the market, so your investments are as lucrative as possible. It also offers one of the most tax-efficient models of any of the other robo-advisor investors we’ve seen, and its new, fully mobile, financial planning service gives it an edge over many of the top automated investing sites out there. Learn more about Wealthfront here.

Price: 0.25 percent of investment, free for under $10,000 investment

Best IRA for Convenience: Betterment

IRAs seem to be what automated investing services were invented for, and Betterment is one of the best automated investment services. The best part about Betterment is that it allows you to pick your investment strategy based on your goals. Betterment will ask you a lot of questions about your goals and risk tolerance. It will then give you goal options based on different criteria, like having a safety net for unexpected expenses, how much you should save for retirement and what you should be putting in general investment accounts. This goal-based strategy gives a more personal feeling to the investment process and makes things a little easier to understand for the everyday investor. Learn more about Betterment here.

Price: 0.25-0.5 percent of investment annually

Best IRA for Being Hands On: Ally Invest

Unlike automated investing services, Ally Invest’s IRA services let you be more hands-on when it comes to your IRA. Of course, it does also offer an automated version of its services, so you can still automate your IRA through TradeKing. Ally Invest also has one of the cheaper costs when it comes to investing, which make it a highly ranked investing service.

Price: Prices are based on where you set up an automated account or traditional IRA.

Best IRA for Motif Investments: Motif Investing

If you want to have a little more say in what you are investing in but don’t want to get into the nitty-gritty of it, motifs might be the best option for you. Motifs are basically a grouping of stocks that have a common attribute. For example, you can have a “Clean Energy” motif that includes companies dedicated to clean energy. And if picking subjects that are personal is important to you, you can create a tailor-made IRA that not only prepares you for retirement but also showcases your interests. Keep in mind that motif does not offer cryptocurrency options. If you are interested in cryptocurrency, check out the best cryptocurrency apps to learn more.

Motif Investing is the best motif-specific investing solution around, which makes it the obvious choice.

Price: $4.95/month for automated, but varies based on the number of motifs.

Best IRA for Technological Help: FutureAdvisor

FutureAdvisor doesn’t offer IRAs per say, but it does offer a tried and tested algorithm that will help you make the best investment in an IRA that you set up through one of its partners: Fidelity and TD Ameritrade. The benefit of using FutureAdvisor is you get the help of its technological expertise, with ongoing monitoring services and automatic balancing adjustments for all of your investment accounts. FutureAdvisor is often considered one of the best automated investing services because of its complex algorithm that helps you optimize your investments. Here’s a more detailed look at FutureAdvisor.

Price: 0.5 percent annual rate

The acronym “IRA” is short for “individual retirement account.” A traditional IRA allows anyone under the age of 70.5 to invest their money. Once you open this type of account and add money, you can watch your investment grow tax free, which means the money in the IRA account is not taxed until you withdraw it. In addition, the money you contribute to it throughout the year is tax deductible.

Another type of IRA account is a Roth IRA, and it works a little differently in that when you contribute money to this kind of account, you pay taxes on it first. This way, you do not have to pay taxes on your earnings once you withdraw the funds. To qualify for a Roth IRA, you can be any age, not just younger than 70.5 like with a traditional IRA. With both types of IRA accounts, you’ll need to pay attention to certain income requirements. You’ll also find that the contribution limits are the same as the limits of a traditional IRA, but they differ from the contribution limits of a 401(k). This detail might affect your choice of which retirement account to open if you’re hoping to invest a lot of money at once.

When you open a traditional IRA, the amount of money you put in the account cannot exceed the current IRA contribution limits. They tend to slightly vary from one year to another to adjust for the cost of living at the time. According to the IRS, the IRA contribution limits for fall 2016 are $5,500, or $6,500 if you’re 50 or older. And due to the income limits imposed by the IRS, your contributions cannot exceed your annual taxable compensation, even if that amount is less than the $5,500 IRA contribution limits.

Roth IRA Contribution Limits

The Roth IRA contribution limits are the same as the IRA contribution limits. This means you can contribute up to $5,500 per year, or $6,500 if you’re 50 years old or older. And your Roth IRA contribution limits may be even less than this if you make over a certain income, thanks to the Roth IRA income limits. Note that the contribution limits apply to both types of accounts, so if you have both an IRA and a Roth IRA, you can only contribute $5,500 combined, not to each account.

Roth IRA Income Limits

You’re only permitted to contribute to a Roth IRA if your income is below a certain amount each year. This range changes slightly most years, but for Fall 2016, the Roth IRA income limits start at $117,000 for single tax filers and end at $133,000. The range for married filers is $184,000 to $194,000. Note that the more money you make, the less you can contribute to your Roth IRA. For example, if you make less than $117,000, you can contribute up to the annual limit of $5,500. If you make $117,000 or more, but less than $133,000, you can contribute a reduced amount to your Roth IRA. And if you make more than $133,000 as a single filer, you cannot contribute to this type of account and should find another investment option for retirement funds.


One of the main benefits of a 401(k) compared to an IRA is that the limits tend to be much higher, which is especially beneficial if you’re starting your account later in life and need the ability to contribute a lot each year. For example, in 2016, the 401(k) contribution limit is $18,000 per year, which is more than three times the IRA contribution limit. So if you want to put away a large amount of money for retirement as soon as possible, a 401(k) may be appealing to you. And like IRAs, if you’re 50 or older, you can contribute even more money to your 401(k), since the limit for this age group is $24,000.


Another reason some people prefer a 401(k) to an IRA is that employers often make contributions to 401(k)s. This can significantly speed up the growth of the account, so if your employer matches your contributions, a 401(k) may be right for you. Of course, there is a limit to the amount of contributions your employer can make. More specifically, the limit for contributions made by you and your employer combined is $52,000 per year, or $57,500 if you’re 50 or older. Note that you can borrow against your 401(k) if you need to, in which case the higher limits may come in handy during a time of financial need.

Like any other type of investment account, there are some downsides to 401(k)s. One is that many employers limit the investment options for those who have a 401(k) account. On the other hand, your investment options with an IRA are unlimited, allowing you to invest in the stocks you want if you have any in mind. Another disadvantage of a 401(k) is that it’s tied to your employer, which means you have to stop contributing to it when you leave your current job. You can then choose to either keep the 401(k) without adding any other money to it, or roll it over into an IRA so you can keep adding to your retirement fund.

Clearly, there are pros and cons to both the IRA and the 401(k). With an IRA, you have more freedom when it comes to your investment options, and the account is not tied to a particular employer. But the downside is that there’s no chance for employer matching of your funds, and also your contribution limits are much lower. With a 401(k), your investment account often grows faster, thanks to higher limits and the possibility of employer matching, but you don’t have as much flexibility. Be sure to take all of these differences into account before you decide whether a 401(k) or IRA is best for you as you plan for retirement.

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