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Which should I invest in first: a 401(k) or an IRA?


Your 401(k) should be the higher priority for several reasons. The main one is matching contributions from your boss. In a typical 401(k) plan, the employer will add money to the pot in proportion to the amount that an employee salts away. A common ratio is 50 cents on the dollar, so if a participant sets aside 6 percent of his or her salary, the employer will add 3 percent. If that ratio applies to you, and if your 401(k) were to be invested in the same assets as your IRA, or individual retirement account, would have been, then you would accumulate 50 percent more for retirement in a 401(k).
Another reason that a 401(k) is a better first choice is that the Internal Revenue Service limits the tax deduction on an IRA for high earners who participate in a 401(k) or other employer-sponsored plan. That means that if you make decent money and make even the smallest contribution to a 401(k), you could lose the tax deduction on all of your IRA contributions for that year. Finally, although it is likely to affect very few people, 401(k) assets are completely protected in a personal bankruptcy filing, while some states allow creditors to get their hands on some portion of IRA assets. That should be a very minor consideration, but it and the others all stack up on the same side of the ledger.
-Conrad de Aenlle