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retirement

Which to fund first: 401(k) or IRA?

 

 

[Begin VIDEO with Kristin Arnold, Bankrate.com anchor introducing the video topic]

INTRO: Investing for retirement is never simple or predictable. And if you have more than one investment option, like a 401(k) and an IRA, you might be confused as to which one you should fund first. There's no one-size-fits-all answer ... but to help give us some insight is Greg McBride, senior financial analyst with Bankrate.com.

[Cut to a double screen of Kristin Arnold and Senior Financial Analyst for Bankrate.com, Greg McBride]

Kristin Arnold: Greg, let's start with a quick explanation of both 401ks and IRAs.

Greg McBride: A 401k is a workplace retirement program where money is automatically deducted from your paycheck and invested for retirement. Now, typically this money comes out before taxes and then you pay taxes when you withdrawal that money in retirement. Some employers offer what is known as a Roth 401k option whereby you contribute money after taxes, but your withdrawals in retirement are tax free. Now, with an IRA, this is something you set up on your own ... with a bank, a brokerage or a mutual fund company and you have the option of contributing pre-tax money - to what is known as a traditional IRA or after-tax money to what is known as a Roth IRA.

Kristin Arnold: How do people with limited dollars to save decide whether to fund a 401k or an IRA first?

Greg McBride: The important is ... it's not either or, you can do both. But, what's the pecking order? Start by taking advantage of the free money. If there's an employer match in your 401k, first you want make sure you contribute enough to take advantage of that ... you don't want to pass up free money. Secondly, if you're eligible to contribute to a Roth IRA ... and that's based upon income, then focus on contributing the maximum there. You're withdrawals in retirement will be tax-free. Now, if you get to the point where you've done both of those and you still have more money to invest, your third option then is to go back to the that 401k and increase the annual contributions ... the maximum limit on the 401k is a lot higher than what you've already put into your IRA.

[Cut to one-shot of Kristin on camera]

TAG: Good information, Greg ... Thank you. You should always research your investment options before investing ... to do that, just log onto Bankrate.com. I'm Kristin Arnold.

[END VIDEO CLIP]

 

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