Wouldn’t it be nice if you had enough money to make the maximum yearly contributions to your individual retirement account, or IRA, and a company 401(k)? Most of us cannot, however, and that’s why understanding the advantages of an IRA and a 401(k) can help you decide how to best invest for retirement. Here are three tips that will help you invest wisely.
Get a match
The average employer match in a 401(k) is 50 cents to every dollar you contribute, up to 6 percent of your income. That’s a great deal if you plan to stay put at your job for a while. Be sure to learn about your employer’s rules on matching. Some companies pay out in a lump sum at the end of each fiscal year, and others use a “vesting schedule,” which pays over a designated amount of time (usually five years). If your employer is on a vesting schedule and you don’t plan to stay there for the long haul, an IRA might be a better choice.
In 2011, the maximum contribution you can make to a 401(k) is $16,500 or $22,000 if you’re older than 50. An IRA only allows for a contribution of $5,000 or $6,000 for those 50 and older. If you max out your 401(k) plan and still have cash left over, you can invest in a Roth or traditional IRA.
Consider the options
With a company 401(k), you are both subjected and limited to the investment risks that your employer takes. An IRA gives you the option to take more risks. A 401(k), however, offers stable-value funds, which return more than money market funds without greater risk.
To calculate whether an individual retirement account or 401(k) plan would be better for you, use Bankrate’s retirement calculators.