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Question for the Money Doctors

Question submitted on Mar 30, 2023.


Should I stop contributing to my 401(K); I want to just start a traditional IRA.

I am 12 years from retirement.


Not knowing the specifics of your financial situation, you may want to continue contributing to your 401(k).  The maximum amount you can contribute to your 401(k) in 2023 is $22,500 (and an additional $7,500 if you are over 50), compared to only $6,500 (with an additional $1,000 if you are over 50) for a traditional IRA.  Another perk of a 401(k) is that if your employer provides a matching contribution, you are getting essentially “free” compensation money into your 401(k) account.  Contributions to a 401(k) may or may not be pre-tax (tax-deductible) depending on if your employer’s Plan has a Roth 401(k) feature, whereas contributions to a traditional IRA may or may not be tax-deductible depending on your income if you or your spouse are covered by a workplace retirement account. 

A traditional IRA generally provides a wider variety of investment options, greater control over your own funds, and is available to anyone with earned income.  However,  investing in a traditional IRA does require some investment knowledge if you are handling on your own without an Investment Advisor.  Additionally, if you want to set up a Roth IRA depending on your tax situation, financial plan and investment strategy, that may be another option to look at.

Also note that you are not limited to investing in one or the other; you could keep contributing to your 401(k) and start a traditional IRA or Roth IRA.  This way, you could contribute to the IRA until you meet the limit, and then also contribute to your 401(k) and have your employer match contribution included as well. 

You may want to consider an Advisor depending on your situation.  A CPA/PFS in your area would be an excellent choice.

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