For many, the biggest benefit of a 401(k) plan (or 403(b) or 457) is an employer match—usually 3% to 6% of your pay. Essentially, it's free money you've earned just for contributing to your account.
In addition, saving through a 401(k) is easy. Contributions are deducted from your paycheck and invested based on your choices. Some employers enroll you automatically—often on Day One. Features like automatic contribution increases make it effortless to save more as time passes. And while the plans' investment options are limited, they often include target-date funds that give you a diversified portfolio based on your age.
Also, many employers offer both traditional pretax and Roth after-tax options. If your employer offers a match, those funds will likely go to the traditional account.
Contribution limits for 2020 and 2021
|Account ||Regular Contribution Limit ||Age 50+ Extra "Catch-Up" Limit |
|IRA ||$6,000 ||$1,000 |
|401(k), 403(b) or 457 ||$19,500 ||$6,500 |
Is it better to have an IRA or a 401(k)?
IRA vs. 401(k)? The right answer for you depends on your income, retirement goals and other financial details.
401(k)s are a good idea for nearly any employee who can participate, especially if a match is available. IRAs are great for anyone who doesn't have a retirement account through work. Anyone who wants to save more outside work can also take advantage.
Can you have a 401(k) and an IRA?
You aren't limited to one type of retirement account. Many determined retirement savers contribute to both a 401(k) and an IRA. You can save up to the respective annual limit in each account, though tax benefits on IRA contributions might depend on your income level and other factors.
Indeed, having both a 401(k) and an IRA can help you avoid one of the biggest financial regrets people experience as they age: not having saved enough for retirement.