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Investing Basics

401(k)/403(b) vs IRA: Which Should I Choose?

401(k), 403(b), individual retirement account (IRA)…the different retirement accounts can sound like an alphabet soup. If you are wondering how to make sense of available options, the information below can help.

A key point:

If your employer offers a retirement investing account with a matching contribution, you should consider investing there first to receive the full employer match, if you can. Why? Because that matching contribution from your employer is equal to a 100% return on your investment, which is really, really rare in investing.*

Note: If you are an employer and you offer your staff a matching contribution, have you considered shifting to a guaranteed (also known as “nonelective”) contribution? Here’s an explanation of how making the switch can help close racial wealth gaps among your colleagues.

The quick(ish) explanation:

Investing through a workplace sponsored retirement account – for example, 401(k) or 403(b) – could be right for you if:

  • Your employer offers this benefit. Especially if your employer offers a matching contribution, you should consider investing first into your workplace sponsored account (before contributing to an IRA) to receive the full employer match, if your budget allows.*
  • You want to invest more than the IRA annual contribution maximum.
  • Your income exceeds the maximum allowed to contribute to a Roth IRA; or, your income exceeds the maximum allowed to deduct contributions to a pre-tax IRA.

Investing through an individual retirement account (IRA) could be right for you if:

  • Your employer does not offer a workplace sponsored account.
  • Your employer offers a workplace sponsored account and you are already contributing the maximum yearly amount – or at least enough to get your full employer match, if available* – AND you want to invest even more to prepare for retirement.
  • You want the freedom to invest with a specific company or in funds that your workplace sponsored plan does not offer. For example, if you like Just Futures’ approach to investing, which aligns with social justice values, consider opening an IRA with us!

You can invest in both a workplace sponsored account and an IRA.

The details:

The two main categories of retirement accounts are 1) workplace/employer sponsored retirement accounts and 2) individual retirement accounts (IRAs).

A workplace/employer sponsored retirement account is a tax-advantaged investment account that an employer may offer their employees. Two common examples of such accounts are 401(k) and 403(b).

An individual retirement account (IRA) is a tax-advantaged investment account that you can open directly with a financial institution, provided you or your spouse have “earned income”.

This chart compares 401(k)/403(b) accounts with IRAs. Note: other types of employer sponsored retirement accounts – for example, SIMPLE IRA, SEP IRA, 457 plans (state and local governments and some nonprofits) and Thrift Savings Plan (TSP) (federal government) – often have rules similar to 401(k)/403(b) accounts; however, the rules sometimes differ. Please verify rules with your plan administrator or tax advisor before making investment decisions.

Key differences:

    • Some workplace sponsored accounts allow you to take a loan, but IRAs do not.
    • Your workplace sponsored account may not offer a Roth version. If you would like this option, you can find an IRA provider that offers it (many providers do).
    • Your workplace sponsored account might not allow hardship withdrawals. If you would like this option, you can find an IRA provider that offers it (many providers do).
    • After taking full advantage of a matching contribution from your employer,* you may want to consider contributing through an IRA if the fees on your 401(k)/403(b) plan are high. High fees can cut into your overall savings, particularly if you have a lower account balance. When comparing fees,consider all fees, including fixed monthly or annual fees (flat dollar amount or percentage of your account assets), administrative fees, advisory fees, fund fees, and potentially other (sometimes hidden) fees.
    • Your spouse can contribute “earned income” into your IRA but not into your workplace sponsored account.
    • For a workplace sponsored account, you can only contribute from your paycheck, which limits how much you can invest. For example:
        • If you begin contributing late in the year, you can only contribute from those later pay periods. You cannot contribute retroactively.
        • If you acquire money outside of your paycheck – an inheritance, a gift, or lottery winnings, for example – you cannot put that money into a 401(k)/403(b). You could, however, contribute more from your paycheck into your 401(k)/403(b) and then use your newfound wealth toward expenses you would otherwise cover with your paycheck.
        • This limitation does not apply to an IRA. Just note: your contribution to an IRA for any given year must not exceed the amount of “earned income” you or your spouse have that year. AND, if you have a sizable amount of money, instead of investing it all at once, conventional investment wisdom says you should consider investing it in installments over time instead.
    • If you want your tax advantage to be linked to a particular year, IRAs are more flexible. The contribution deadline for an IRA is the tax filing deadline (e.g., April 15, 2025 to contribute for 2024), versus December 31 (e.g., December 31, 2024 to contribute for 2024) for a workplace sponsored account.
    • You may be able to delay taking required minimum distributions (RMDs) from your workplace sponsored account but not from your IRA.
    • Assets in your workplace sponsored account may enjoy stronger legal protections against creditors than assets in your IRA.

Hungry for more knowledge? Read on to learn about how to decide between a Roth or pre-tax account.

If you don’t have a retirement investing account, or if your employer contracts with a different retirement plan administrator, we’d love to show you the advantages we at Just Futures can offer! Contact us: info@justfutures.com.

~Lisa, Manager of Coalitions and Worker Power

*Any contributions you make to your 401(k)/403(b) are yours. However, depending on your employer plan’s vesting schedule, the matching contribution from your employer may not be yours unless you meet the requirements. Some vesting schedules require you to stay at your job for a predetermined amount of time before the employer match is yours to keep. For example, you might be entitled to 100% of an employer match if you've stayed 3 years, but none if you leave before then. Another variation of a vesting schedule is earning 20% of an employer match for every year you stay, so you receive 100% of the match once you've stayed for 5 years. Check your plan's rules if you're thinking of changing jobs.

Dollar cost averaging may help reduce per share cost through continuous investment in securities regardless of fluctuating prices and does not guarantee profitability nor can it protect from loss in a declining market. The investor should consider his/her ability to continue investing through periods of low price levels.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Nothing contained herein is to be considered a solicitation, research material, an investment recommendation or advice of any kind.

The information contained herein may contain information that is subject to change without notice. Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Product suitability must be independently determined for each individual investor. Just Futures explicitly disclaims any responsibility for product suitability or suitability determinations related to individual investors.

Investing involves the risk of loss that clients should be prepared to bear. No investment process is free of risk; no strategy or risk management technique can guarantee returns or eliminate risk in any market environment. There is no guarantee that your investment will be profitable. Past performance is not a guide to future performance. The value of investments, as well any investment income, is not guaranteed and can fluctuate based on market conditions.

Published February 3, 2025