Choosing a 401(k) or an IRA?

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Q. I don’t like the investments in my 401(k). Should I save to an IRA instead? What are the pros and cons?
— Investor

A. A 401(k) plan offers some advantages that an IRS does not.

Advisors generally say you should use a 401(k) if you’re fortunate enough to have one.

That’s because your contributions to the plan come out before the money comes out of your pay before being taxed and before you get a chance to spend it, said Bill Connington of Connington Wealth Management in Paramus.

Plus, the amount you can contribute to a 401(k) is greater than an IRA, and you may also be eligible for an employer match, which you can look at as free money, Connington said.

“Your employer’s contribution to your 401(k) does not count against your annual contribution limit which is $18,000 for 2016,” he said. “You can also borrow against your 401(k).”

If you’re over age 50, you can save $24,000 a year.

As you said, one of the drawbacks to a 401(k) may be that you don’t have great investment options inside the plan.

Under the Employee Retirement Income Security Act of 1974 (ERISA), 401(k) plan fiduciaries — your employer — are charged with a duty to act prudently, which includes a duty to choose investments that are sensible at the time of selection, said Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.

He said the fiduciary has a continuing duty to monitor an investment alternative offered under a 401(k) plan after it has been selected.

“Your 401(k) plan should offer investment alternatives that provide you, the participant, the ability to allocate your 401(k) account into investment choices that are consistent with your personal investment policy statement, which identifies your time horizon, your willingness to accept risk and your ability to accept risk,” Papetti said.

If you do not like the choices in your 401(k) plan is because there are limited options or because of poor performance of the funds offered compared to other funds in the same asset category, you should bring that to the attention of the plan fiduciaries, Papetti said.

Looking at an IRA as an option, one of the benefits is that the investments you can choose are not limited by a plan, Connington said.

“An IRA is a big box that you can fill with investments that you or your advisor think fit your needs, returns and risk portfolio,” he said.

You can contribute up to $5,500 in 2016 and if over age 50, you can add another $1,000 in a “catch-up” provision.

You can’t borrow against an IRA and if you do have a plan at work, you may not deduct the contributions. See the chart below for more information on the phase-outs.

Connington said the best course of action for saving for retirement would be to invest in your company 401(k), maxing out your contribution, and then also investing in an IRA where you choose the investments.

“This way you can have the best of both worlds and reduce the issue of poor investments,” he said. “The sooner you begin to invest for retirement the better off you will be. So get started and utilize all your options to save for the lifestyle you want when retirement becomes your reality.”

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This story was first posted in April 2016. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.