Individual Retirement Accounts (IRAs) and 401(k) plans are both vehicles for retirement savings. Data collected in 2011 indicates that the combined value for both types of plans account for over 8.75 trillion dollars worth of retirement savings! However, despite the fact that eligible workers can contribute over three times as much money to a 401(k) as to an IRA, money in IRAs total over half the collective sum of both types of accounts. What makes people gravitate towards the IRA?

First off, the 401(k) plan is only available to less than 50% of working Americans. Many companies do not offer such plans and those workers have no option to participate. Since IRAs are unattached to a specific job, more people are eligible to contribute to such plans. This flexibility, combined with potential tax breaks for contributions, attracts investors. Additionally, as employees change jobs, they often prefer to roll any existing 401(k) funds into a Rollover IRA. The IRA often offers more investment choices and lower expenses than are present in the 401(k) plan. These factors, combined with the convenience of centralizing all retirement savings with a single financial institution, attract more dollars to IRAs.

Some investors take advantage of both the 401(k) and the IRA. Many companies will match a certain amount of your contribution to a 401(k); for example, a company may match up to 2% of your monthly salary. Informed investors often contribute the minimum required to get the matching company contribution. They then direct any remaining available funds into an IRA. This approach takes advantage of the strengths of each financial vehicle. Most financial advisors would at least recommend taking advantage of any matching programs offered through your workplace. After you have contributed to such a plan, any remaining extra money applies to reduce high-interest debt and then move towards additional investment plans.

Data indicates that IRAs are popular investment vehicles for retirement savings. However, if you have access to a 401(k) plan, be sure to understand it so to have the most options available to you as you plan and save for retirement.

Source: U.S. News and World Report