Mad Money

Why IRAs Are Better Than 401(k)s

Don’t max out your 401(k) contributions, Cramer said. That money could be better spent.

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You definitely don’t want to turn down the free money that comes with a company 401(k) match. Cramer’s rule of thumb is to only contribute as much as your company is willing to put in. If your company will match 3%, then only put 3% of your pay into a 401(k).

But too often these retirement options have high management fees and your investment choices are limited. That’s why Cramer recommends that any extra money you have beyond a company’s match go into an IRA. They get the same great tax benefits of a 401(k), they cost less and grant you more freedom of movement.

Cramer was specifically talking about regular IRAs, not Roth IRAs. For regular IRAs, your contributions are tax-deductible, and you pay no taxes on gains mad until you start withdrawing the money during retirement – and then the tax rate is the same as regular income.

You can contribute $5,000 to an IRA in 2008 -- $6,000 if you’re over 50. Cramer recommended you do just that. If you still have money left over after that – and only then – feel free to put even more money into a 401(k), he said.

The combination of these two investment vehicles should make for a much better retirement.




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