Why IRAs Are Better Than 401(k)s

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

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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