Which is better: An IRA or 401(k)?

Retirement » Which Is Better: An IRA Or 401(k)?

More options for withdrawing money penalty-free
More options for withdrawing money penalty-free © wavebreakmedia/

In most cases, if you are younger than 59 1/2 years old and make a withdrawal from a retirement account -- either an IRA or a 401(k) -- you generally will have to pay taxes on the money, plus a 10 percent penalty.

But there are exceptions to the penalty rule, and some of them apply only to IRAs and not to 401(k) plans.

For example, first-time homeowners may tap their IRA for up to $10,000 to be applied toward a down payment for a house without paying a penalty.

You also can withdraw IRA cash penalty-free to fund higher education costs for yourself or immediate family members.

Try those maneuvers in a 401(k) and you will pay a 10 percent penalty.

Finally, if you open a Roth IRA, there are even fewer limitations to early withdrawals.

"You can always withdraw your contributions tax- and penalty-free," Itzoe says.

In addition, you can spend the money however you like. Keep in mind that this rule only applies to your contribution, and that any early withdrawal of investment earnings is subject to a 10 percent penalty.

So, which is better: an IRA or 401(k)? Both have much to recommend themselves, but some might argue that IRAs have several distinct advantages.


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