Individual retirement accounts (IRAs) and 401k plans are two of the most popular retirement investment vehicles, and unless you've got loads of residual income or a truckload of money tucked away for your later years, it's important to make sure you supplement the meager dollar amounts you'll receive from Social Security in your retirement. Both IRAs and 401k's offer tax-deferred savings opportunities, and while it's preferable to have both because each are limited in annual contributions, there are several advantages 401k has over an IRA.
Higher Limits
If you put money into a Roth or traditional IRA, you can't put more than $5,000 into the account each year if you are under 50. With a 401k, the annual limit for your contribution as of 2010 is $16,500. On top of that, your employer can also provide contributions of its own, usually up to 50 percent of the amount you contributed in any given year. This allows you to easily put more than four times as much in a 401k than in an IRA.
Easier Borrowing
In a traditional IRA, you can't take any earnings out of the fund without being hit with a 10 percent penalty fee. With 401k, you can borrow money from the account in most cases without a penalty, provided you back the money back into the fund at a later point. 401k plans also maintain a benefit shared with IRAs by allowing penalty-fee withdrawals in certain cases, such as medical fees and disability. Medical fees must cost more than 7.5 percent of your annual income, while IRAs require the medical expenses to exceed 10 percent of what you make each year.
Reduced Fees
Investing in mutual funds usually results in a load charge, also known as a sales fee, and this fee applies even when you invest through an IRA. If you invest through a 401k plan, though, the charge may be waived or your employer may pay it.
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