In 2011, the Federal Reserve reported that the combined value for Individual Retirement Accounts (IRAs) and employer-sponsored 401(k) plans was over 8.75 trillion dollars. Of that sum, 55% of the funds were in IRAs. This is surprising since the maximum annual contributions to a 401(k) are almost three times greater than to an IRA. Why would there be more money in the combined value of the IRAs?
A primary reason for the above noted disparity is that less than 50% of working Americans have access to a 401(k). Not all companies offer such a plan. IRAs, on the other hand, are available to all workers. This ubiquity, partnered with the tax breaks of the IRA, attracts investors. Another reason for the growth of IRAs is marketing. More and more people know about IRAs. IRAs often offer more investment choices and lower operating costs than the 401(k) plan. Therefore, when an employee changes job, he/she may choose to remove (rollover) the 401(k) funds into an IRA. Additionally, as the IRA accounts multiple, investors appreciate the simplification of having their accounts managed by a single financial institution.
It is possible to use both the 401(k) and the IRA. In a 401(k) plan, some companies will offer a matching contribution. For example, you may be eligible to contribute up to 5% of your salary to the plan, but the employer will only match the first 2%. Some investors choose to only contribute the 2% and receive the matching 2%. Any remaining available money goes into an IRA. The investor gets the advantage of both accounts, though some financial advisors suggest than any additional funds should apply first to high-interest debt before adding to an IRA
It is important to understand the strengths and drawbacks of both IRAs and 401(k) plans. Informed investment decisions are the best. Each approach offers participants opportunities to save for retirement and your personal financial situation will dictate how you invest your money.
Source: U.S. News and World Report www.money.usnews.com