If you're lucky enough to have an employer who does contribute to your retirement, view their contributions as a return on your investment. If they offer a match and you take it, you immediately increase your investment -- something you can't otherwise do without taking on huge risk and getting lucky.
You should almost always put enough into your employer's plan to get the maximum matching contribution. If you do not need to contribute to receive employer contributions or you want to invest more than it takes to get the maximum match, move on to other considerations.
Employer 401(k) plans often allow you to select from a small handful of mutual funds. You may also be forced to pick from predetermined portfolio weights, such as half into a bond fund and half into a stock fund, instead of setting your own investment mix.
By contrast, if you set up your own personal IRA with a broker, you can pick your own mutual funds, ETFs, stocks, bonds and other investments at will. The United States has 3,030 registered ETFs alone, so your investment options are virtually unlimited.
If you want to take a more active role in determining what investments you hold and how much risk you take on, lean towards setting up your own retirement account.
Both personal and employer retirement accounts have pre-tax and after-tax options (assuming your employer offers both).
- Traditional 401(k)s and IRAs are pre-tax. Your contributions are deducted from your salary and are not taxed in the current year. Instead, your contributions and investment gains are taxed when you withdraw them in retirement.
- Roth 401(k)s and IRAs are post-tax. You do not receive a tax deduction for your contributions, but withdrawals of your contributions and investment gains in retirement are tax-free.
The general rule of thumb is to use a traditional 401(k) or IRA when you think your tax bracket will go down in retirement. Use a Roth 401(k) or IRA when you think your tax bracket will go up in retirement.
There are also income limits to consider if you are considering opening a personal retirement account.
- Roth IRAs are only available to those with a modified adjusted gross income of up to $153,000 in 2023 ($218,000 if filing as married).
- Traditional IRAs do not have an income limit, but you may not receive a full deduction for your contributions if you make $73,000 or more and have an employer retirement plan available. See the full IRS chart here.
- 401(k)s do not have an income limit. There is no deduction limit other than your contribution limit.
There are also limits on how much you can contribute to the various retirement plan options.
- IRAs have a maximum annual contribution of $6,500 plus an additional $1,000 if you are 50 or older.
- 401(k)s have a maximum annual contribution of $22,500 plus an additional $6,500 if you are 50 or older.
Regardless of the limit above, you may not contribute more than your actual earnings. For example, if you are working part-time and only made $4,000 during the year, you may not contribute more than $4,000 to either an IRA or 401(k).
If you wish to invest more than your contribution limits, you may open a taxable investment account.
Talk to a Wealth Advisor
Your retirement plan should consider a combination of risk, returns, taxes and contribution limits. Talk to a wealth advisor about the best options for your specific situation.