17 Jun Should I be using a 401(k) or an IRA? Or both?

Q. I have a 401(k) plan that gets matching funds. I have also separately invested in an IRA most years but not all. I’ve been thinking about doing the IRA direct out of my paycheck – less painful than finding a few thousand before the April 15 deadline each year. But if I do this, and then I change my mind, can I take out what I saved to the IRA without a penalty?
— Investor

A. We’re glad to hear that you are taking advantage of the matching funds from your employer’s 401(k).

It’s a smart strategy.

Making sure you’re not leaving any of that “free” money on the table, via your employer’s match, should be your priority, said Michael Cocco, a certified financial planner with Beacon Wealth Partners in Nutley.

Regarding your IRA outside of your employer’s 401(k), is it a Roth IRA or a traditional IRA?

If your income is under certain thresholds, Cocco said he strongly recommends using a Roth IRA.

First, it’s added flexibility to withdraw your contributions at any time without a tax or penalty, and also for potential tax-free treatment on your earnings, if you meet certain requirements, he said.

If your IRA is a Traditional IRA, that may have certain advantages, such as tax deductibility on those contributions, but that is subject to income limitations as well, he said.

“Because your IRA is outside of your employer, you may not be able to have those contributions automatically taken out of your paycheck like your 401(k), but you could have them taken out of your checking account on a monthly basis, and that would be wise to help `soften the blow’ of finding the money for a full IRA contribution all at once, and also to allow you to dollar cost average your purchases over time, so that way if the market is volatile throughout the year, you have the opportunity to make some purchases at lower prices,” he said.

However, Traditional IRAs have important restrictions that you need to note, such as the fact that withdrawals before age 59½ typically incur a 10% early withdrawal penalty unless an exception applies, Cocco said.

“So, if you contribute to a traditional IRA and then change your mind, your removal of your contributions may have a penalty along with tax assessed, where in a Roth IRA, you can remove your contributions without penalty and tax,” he said. “However, if you remove your traditional IRA contributions before the tax filing deadline for that year, you will not have to pay a tax penalty.”

Consider working with a financial advisor and an accountant or tax advisor on these questions to make sure you do the right thing for your situation.

Email your questions to Ask@NJMoneyHelp.com.

This story was originally published in June 2025.

NJMoneyHelp.com 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.