IRA vs 401k: Discover the Smartest Way to Invest for Retirement
IRA vs. 401(k)?: Discover the Smartest Way to Invest for Retirement Now
At age 55 and beyond, retirement is no longer a distant idea-it’s right around the corner. Whether you're planning to retire at 60, 65, or even 70, the decisions you make now will have a direct impact on your comfort and security in those golden years. One of the most common questions at this stage is: Should I put my money into a company retirement plan like a 401(k), or into an IRA?
The answer depends on multiple factors—your tax bracket, your income level, your retirement goals, and the types of accounts available to you. But there’s a clear priority strategy many financial experts recommend when it comes to where to put your retirement dollars:
1. Contribute enough to your company plan to get the full employer match 2. Then fund a Roth IRA
3. If ineligible for a Roth, use a Traditional IRA
4. After maxing out tax-advantaged accounts, consider taxable brokerage accounts
Let’s break down exactly how this works—and why this strategy makes sense if you’re age 55 or older and looking to maximize your retirement potential.
Looking for personalized guidance on where your retirement money should go? A one-on-one session with a Certified Financial Planner (CFP) can help you build a tailored strategy to protect and grow your savings—before and after you retire. Call us at Intermountain Wealth Management - 208-522-3344
Step 1: Start with Your Employer Plan—Get the Match
If your company offers a retirement plan like a 401(k), 403(b), or Thrift Savings Plan (TSP) with a matching contribution, that match should be your first priority.
Why? Because it’s essentially free money.
Let’s say your employer offers a 100% match on the first 6% of your salary. If you earn $80,000 annually and contribute $4,800 (6%), your employer also adds $4,800 to your retirement account. That’s an immediate 100% return on your investment, before any market growth is factored in.
When you’re 55+, every year and every dollar counts. You have less time for compounding to do the heavy lifting, so employer contributions give you a much-needed boost. Missing out on the match is like leaving money on the table.
Contribution Limits (Age 50+ for 2025): You can contribute up to $31,000—that’s the $23,500 base limit plus a $7,500 catch-up contribution if you're age 50 or older. And if you’re age 60–63, you may qualify for an enhanced catch-up of $11,250, bringing your total to $34,750 (limits may change, so confirm current IRS guidelines).
Step 2: Max Out a Roth IRA
Once you’ve captured the full match from your employer, the next move is to fund a Roth IRA, if you’re eligible.
A Roth IRA is funded with after-tax dollars, meaning you don’t get a deduction today—but all qualified withdrawals in retirement are completely tax-free.
This is especially beneficial if you expect to be in a similar or higher tax bracket when you retire, or simply want to avoid future tax surprises. The older you get, the more valuable tax free income becomes. With a Roth, you lock in today’s tax rate and enjoy freedom in retirement without worrying about Uncle Sam taking a cut.
Additional Benefits:
• Withdraw contributions (not earnings) at any time with no penalties. • No required minimum distributions (RMDs) at age 73, unlike other accounts. • Flexible estate planning options for passing on wealth tax-free.
Contribution Limits (Age 50+ for 2025): You can contribute up to $8,000—$7,000 standard plus a $1,000 catch-up contribution.
Note: Roth IRA income limits apply. For 2025, eligibility begins to phase out for individuals earning over $153,000 and couples over $228,000 (subject to updates).
Step 3: Use a Traditional IRA if You’re Not Roth-Eligible
If your income exceeds the Roth IRA limits, a Traditional IRA is your next best option.
A Traditional IRA offers tax-deferred growth, and your contributions may be tax deductible depending on your income and whether you or your spouse are covered by a workplace plan. While withdrawals in retirement will be taxed as ordinary income, a Traditional IRA still provides key advantages:
• Lowers your taxable income now
• Grows tax-deferred
• Accessible investment options
At age 55+, many people use Traditional IRAs for the tax deduction today and plan to withdraw the funds later at a lower tax rate in retirement.
Contribution Limits (Age 50+ for 2025): Same as Roth — up to $8,000 annually with catch up.
Strategy Tip: If you’re phased out of Roth contributions, you might consider a Backdoor Roth IRA—contribute to a Traditional IRA and convert it to a Roth. Speak with a tax advisor to ensure it’s the right move for you.
Step 4: Consider a Taxable Brokerage Account Last
Once you’ve maxed out your employer plan (to the match), a Roth IRA, and even a Traditional IRA, any additional funds can go into a taxable brokerage account.
This type of account has no contribution limits or age restrictions, and offers flexibility to invest in stocks, ETFs, mutual funds, and more. However, it does not offer tax-deferred growth. You’ll pay taxes annually on dividends, interest, and realized capital gains.
Still, brokerage accounts are useful for:
• Building additional retirement income
• Supplementing early retirement (before age 59½)
• Creating more liquidity and access to funds
If you’ve done all you can in tax-advantaged spaces, a brokerage account gives you freedom to keep investing.
Key Considerations for Those 55 and Over
Time Horizon Still Matters
Even if you plan to retire in 5–10 years, your money could remain invested for 20–30 years. Strategic planning today allows your investments to grow and sustain your lifestyle long after your final paycheck.
Catch-Up Contributions Are a Must
At 55+, you can contribute more than younger workers. This allows you to accelerate your savings in the critical years before retirement.
Control Over Taxes
Roth IRAs give you predictable, tax-free income in retirement. Having both pre-tax and post-tax accounts gives you flexibility in how much you withdraw each year—and how much tax you pay.
Healthcare and Medicare
At age 65, Medicare eligibility begins. Planning ahead with retirement accounts can help
you bridge the gap before then and manage healthcare costs strategically.
RMD Planning
Traditional IRAs and 401(k)s are not subject to Required Minimum Distributions (RMDs) starting at age 73 or 75. Roth IRAs are not. This can help you manage taxable income and minimize Medicare surcharges or Social Security taxes.
Your Smart Retirement Strategy: A Quick Summary
Here’s a clear and practical order of operations for retirement investing if you’re 55 or older: 1. Contribute to your company retirement plan up to the full match. 2. Max out your Roth IRA.
3. Use a Traditional IRA if you’re ineligible for Roth.
4. Invest in a taxable brokerage account once all tax-advantaged options are maxed.
This order is designed to optimize taxes, maximize growth, and give you financial flexibility in retirement.
Final Thought: Be Strategic, Not Just Consistent
At this stage of life, it's not just about saving—it's about positioning your money wisely. Where your dollars go determines how much you’ll have, how it’s taxed, and how much control you’ll retain in retirement.
By following a structured investment plan that prioritizes tax-advantaged accounts and captures every available benefit—like employer matching and Roth tax-free growth—you can build a stronger, more confident financial future.
Even if you feel like you're getting a "late start," remember, it’s never too late to make smart, strategic choices. With focused effort and the right financial direction, you can still create a retirement that’s not just sustainable—but fulfilling.
If you’d like help building a retirement strategy or organizing your accounts for maximum benefit, consider working with a Certified Financial Planner (CFP). A CFP can not only help you determine the best places to put your money—whether that's your company plan, Roth IRA, Traditional IRA, or a brokerage account—but also help you strategically manage taxes in retirement, ensuring you withdraw money in the most tax-efficient way possible. With expert guidance, you can maximize your income, minimize your tax burden, and create a retirement plan that supports both your lifestyle and long-term financial goals.
Intermountain Wealth Management is a Registered Investment Adviser (RIA). The company manages several fee-based portfolios comprised of various equity and fixed-income investments that may include mutual funds and exchange traded funds. This is not a prospectus or an offer to sell any security. Please read the prospectus of any investment before you invest. Information included here is intended for education and information purposes only.
