IRA vs 401(k) Q & A

Aug 2015

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Q         Dear Rick:

I met you at one of the talks you did for the students at Lawrence Tech.  One of the things you said at the seminar was the importance of saving for retirement as soon as you can.  You recommended that people take advantage of a 401(k) Plan.  This is where my problem develops.  I have been offered a job with a few different companies.  I’ve narrowed it down to two companies and that’s where I need your help.  The pay is generally the same between the two companies; however, the major difference deals with the 401(k) Plan.  Company 1 has no 401(k) Plan versus company 2 who has a 401(k) Plan.  During your talk at Lawrence Tech you did mention that we should save 10 percent of our salary for our retirement.  Currently, that would be about $4,000.  All things being equal I’d rather go to the company without the 401(k) Plan.  Do you think I am making a mistake from my retirement standpoint of going to a company without a 401(k) Plan?


A         Dear Andrew:

As a side note, I am what is known as the Executive in Residence at Lawrence Tech and that position gives me the opportunity to interact with students throughout the school year, helping them make better decisions with their money.  In meeting with the students at Lawrence Tech the one thing that never ceases to amaze me is how bright these students truly are.

In looking at your situation, I think you’re in a position where you can have your cake and eat it too.  Even though the company that you want to work for does not offer a salary retirement plan, that doesn’t mean that you can’t save for your retirement in a tax efficient manner.  The mechanics are a little different but the outcome is the same.  Therefore, it is possible to have the job you want and also be able to save for your retirement.  The way to accomplish this is through the use of an IRA.


At your age you can contribute up to $5,500 per year into a retirement account such as an IRA.  There are two different types of IRAs that you can use; a traditional IRA and a Roth IRA. The main difference for you between a traditional IRA vs. a Traditional 401(k) would be recording a deduction on your tax return.  With a 401(k) Plan, your W-2 is net the amount that is going into your 401(k) Plan, so no deduction is required.  On the other hand, if you do use a traditional IRA, you do have to claim the contribution as a deduction on your tax return.


You can also decide to use a Roth IRA which would be basically the same thing as a Roth 401(k).  The benefit of the Roth option versus the traditional is the fact that the money would grow tax free versus tax deferred. The longer you can let the money grow tax-free with the Roth option is certainly a benefit.  The downside of the Roth is you cannot claim a deduction for the contribution on your tax return.  Similarly, in a Roth 401(k) Plan you are taxed on the gross amount versus the net amount.  However, over the long run, by allowing money to grow tax free, it certainly would be a benefit for you.


Either option – the traditional or the Roth IRA, would allow you to save for your retirement and at the same time have a job in a place where you would feel comfortable.  In that regard, once you feel comfortable at the job, you may want to find out why they don’t offer a 401(k) Plan.  Many small businesses don’t offer a 401(k) plan because they think it is expensive and administratively difficult to manage.  In the past, that was the case; that is no longer the case today.  There are many fine, low-cost carriers for 401(k) plans that are available for small businesses.  I wouldn’t necessarily recommend bringing it up on your first day of work, but down the road maybe in a review, talking to them about a 401(k) plan may be something you feel comfortable discussing with them.


One last note, if you are looking for a new job, it is fair and smart to consider the perks that a company offers.  A company that offers a good low-cost 401(k) Plan can literally mean tens of thousands of more dollars in your pocket when you retire and that is something that we all should be concerned with.


Good luck!