CNBC’s Jim Cramer said he thinks financial literacy is lacking at most schools in the U.S., especially when it comes to individual retirement accounts, or IRAs, as well as 401(k) plans. It’s important that everyone knows how best to save for retirement with some sort of tax-favored account, according to Cramer.
Cramer explained that putting your retirement savings in a 401(k) or an IRA can both be good options. One might be better than the other depending on your individual needs or your employer’s policies.
“The best thing about a 401(k) is that it’s tax deferred,” Cramer said. “In plain English, that means you pay no taxes on what you put in. And then, you never pay a penny of capital gains taxes on the profits you make within your 401(k), which allows your gains to compound year after year, decade after decade, totally tax-free until you decide to start making withdrawals.”
According to Cramer, 401(k)s can be a solid option if your employer can match or partially match your contributions, like 50 cents for every dollar you invest up to a certain point. Without a matching program, however, an IRA may be the better choice because it has the same tax-deferred status as 401(k)s, but there are usually fewer fees associated with maintaining the plan, Cramer said.
“If the company you work for matches your 401(k) contributions up to a certain point, take them for all they’re worth. But other than that, an IRA is the superior way to go, especially if your 401(k) plan doesn’t give you any good investment options,” Cramer said.
