This post is part of a series where retirement expert Dan Solin offers simple answers to the ten toughest retirement questions. See all 10.
Q: How do I choose between a 401(k) plan and an IRA?
A: You don't necessarily have to make a choice, since you are permitted to invest in both an 401(k) and an IRA, subject to limits on the amount of your contributions to each plan.
Most investors should contribute the minimum amount to their 401(k) required to trigger the maximum employer match.
Once you have maxed out your 401(k), consider a Roth IRA.
While contributions to a Roth IRA are not tax deductible, there is no penalty for early withdrawals up to the amount contributed, and no tax on investment earnings once you reach age 59 ½.
It is important to understand the distinction between tax avoidance, which the Roth IRA provides, and tax deferral, which traditional IRA's and 401(k) plans provide.
With tax deferred plans, you will eventually pay the piper. The only question is: how much?
Unfortunately, not everyone qualifies for a Roth IRA. If you are a single filer and have a "Modified Adjusted Gross income" of more than $101,000, you can't make a full contribution to a Roth. You may still be able to make a partial contribution if you are a single filer and your Modified Adjusted Gross Income is between $101,000 and $116,000 or a joint filer with a Modified Adjusted Gross Income between $159,000 and $169,000.
If your Modified Adjusted Gross income is more that $116,000 as a single filer, or more than $169,000 as a joint filer, you don't qualify for a Roth. If you can't contribute to a Roth IRA, you most likely will qualify for a traditional IRA as long as you have earned income and you are under 70½ years old before the close of your current taxable year.
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