There are many good reasons to save for retirement on a 401 (k) plan. For one thing, many employers who sponsor 401 (k) s also match employee contributions to varying degrees, which means you may have an opportunity to earn free money for your senior years. Plus, 401 (k) contributions are easy and hassle-free. You simply sign up to set aside a portion of each paycheck for retirement purposes, and your payroll department does it automatically so you don’t have to think about it.
In fact, it is not surprising to learn that workers who are offered a 401 (k) retirement savings plan or similar through an employer are more likely to save money for the future than those who do not have access to a employer plan, according to a recent Transamerica Survey. But not having a 401 (k) shouldn’t deter you from building a solid nest that will come in handy once your years of work come to an end.
IRA: A Solid Retirement Savings Tool
At first glance, IRAs may not seem as desirable as 401 (k) when it comes to retirement savings. After all, they don’t allow employers to match, and they also come with much lower annual contribution limits. At this time, IRA accounts reach a maximum of $ 6,000 a year for workers under 50, and $ 7,000 for those over 50. In contrast, this year’s 401 (k) contribution limits are $ 19,500 and $ 26,000, respectively.
But IRAs are still an extremely useful long-term savings tool. For one thing, they offer far more investment options than 401 (k). With the latter, you may be limited to a couple of dozen funds, some of which may come with exorbitant investment fees. With an IRA, you get much more flexibility. You can buy mutual or index funds, but you can also choose to create a portfolio consisting of individual stocks. That gives you much more control over your investments.
Also, all IRA accounts come with a Roth savings option. Now if your income is too high, you will be prohibited from contributing directly to a Roth IRA account, but otherwise there are many benefits to going down that route, i.e. enjoying your tax free withdrawals once you retire. And as more and more 401 (k) plans are starting to offer a Roth version, there are plenty of plans that don’t.
Finally, some IRAs offer an automatic savings feature that allows you to arrange for money to be transferred directly from your checking account to your retirement plan on a consistent basis. That means you won’t risk forgetting to fund your IRA, and it will also eliminate the temptation to spend money destined for retirement.
While it often makes sense to participate in a 401 (k) if that option is on the table, don’t give up on retirement savings just because you don’t have one. IRA accounts facilitate future savings, and you can open one through most banks or financial institutions. Financing one consistently is a good way to help ensure you don’t run out of money when you’re older.