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IRAs and 401ks are two similar ways to save for retirement. Each one of these two plans has their advantages and disadvantages. But which plan is actually the better plan?

Well, let’s take a look.

The 401k maximum contribution limit is a lot higher then an IRA. That makes a 401k a better plan if you have a lot of money to invest with. That could be a big difference when it comes to retirement.

The 401k also has one major advantage and that is, some employers will match your contribution. If your employer gives you an extra $.50 for every $1 that you invest into your plan and you invest $10,000 throughout the year your employer would have invested an additional $5,000 in your account. IRAs do not come with this plan because it is not hosted by an employer.

The IRA also has a few advantages. Both plans do help you to get tax defered growth, however IRAs have another option. There is one type of IRA which offers an investor another option that may be better suited for you.

In a Roth IRA you will get taxed on any money you deposit, but it will be able to grow tax free and when you take it out you will also not have to pay any taxes on it. So if you believe that the tax rate will grow in the future this can be a good way to get around that.

There is one other advantage of an IRA and that is that it may allow you to invest your own money yourself. This gives you the ability to seek out a higher growth rate.

There is one big disadvantage to both of these plans. Both the IRA withdrawal rules as well as the 401k withdrawal rules don’t let you get money out of the account early without making you pay a penalty. Of course that is because they are suppose to be for retirement, but it can still hurt a little if you need the money now.