If your employer don't offer matches to your 401(k) contribution, do you instead opt for an IRA?

One of my friends' workplace does not offer employer matches to an employee's 401(k) contributions. Does my friend instead opt for an IRA account (he does not qualify for a Roth IRA since his income exceeds the maximum income allowed) as his retirement investment vehicle? Also, if you could, what are the retirement investment vehicles for the self-employed? Your advice is greatly appreciated. Thank you in advance.

There is also some new legislation that will go into effect in 2010 that will allow everyone to convert a regular IRA into a Roth IRA. The sucky part is that you will owe taxes on the money at the time of the conversion (tax on the full amount if it was deductible; tax on your profits only if it was nondeductible,) but then you will have the awesome tax benefits of a Roth IRA when you go to withdraw it.

I would therefore recommend fully funding an IRA as a first step, since your friend will be able to convert it into a Roth IRA down the road. Unless new laws are passed, your friend could continuosly invest and convert his IRA into a Roth IRA, which is silly, and is a pain in the butt, but such is life!

The money that goes into the 401(k) is done before taxes, where an IRA is usually after taxes. Therefore, you can get more money invested for less in a 401(k). The other deciding factor is -- what are the investment choices available within the 401(k)? If they are good funds, I definitely would go with that.

I agree with the first response.

The best self-employed plans are the "individual 401(k)" or the "SEP". Both of these plans allow yearly contributions of the lessor of $44,000 (in 2006) or 20% of self-employed earned income. The Individual 401(k) is a relatively new plan option and it has some added features (primarily a $15,000 "employee" deferral option) that likely make it the best option. Administratively, both plans are inexpensive and relatively easy to maintain.

Bear in mind that the annual limit for an Individual IRA is $4000 (rising to $5000 next year), whereas the 401(k) may permit a larger contribution (and therefore a larger tax deferral). As mentioned elsewhere, the available choices in either case is also a prominent factor.