IRA vs. 401 (k)
The path to financial doesn’t have to be as complicated as we tend to make it. Many people find all the options that are available when it comes to retirement planning to be quite confusing.
This article is dedicated to explaining the differences between a 401 (k) plan and an IRA (Individual Retirement Account).Before taking any step seek the guidance and advice of a professional financial planner.
Let’s first look at the 401 (k) plans. A 401(k) retirement savings plan allows a worker to save for retirement and have the savings invested while deferring current income taxes on the saved money and earnings until withdrawal. The employee elects to have a portion of his or her wages paid directly, or “deferred,” into his or her 401(k) account. This deferment is also known as a “contribution.”
401(k) plans are mainly employer sponsored plans; the employer can, as a benefit to the employee, optionally choose to “match” part or all of the employee’s contribution by depositing additional amounts in the employee’s 401(k) account or simply offer a profit sharing contribution to the plan. In participant-directed plans (the most common option), the employee can select from a number of investment options, usually an assortment of mutual funds that emphasize stocks, bonds, money market investments, or some mix of the above. Many companies’ 401(k) plans also offer the option to purchase the company’s stock. The employee can generally re-allocate money among these investment choices at any time. In the less common trustee-directed 401(k) plans, the employer appoints trustees who decide how the plan’s assets will be invested. The title “401(k)” references 26 U.S.C. ยง 401(k), a section of the Internal Revenue Code.
IRAs are another creature all together. You will find much stricter limitations on IRAs than on 401 (k) plans beginning with the fact that if your employer offers a 401 (k) you must make very little money in order to qualify for the tax deductions that this particular retirement fund generally allows. The maximum yearly contribution for your IRA will be $4,000 or 100% of your annual income; whichever is greater up until the age of 49. Once you’ve reached the age of 50 you can invest an additional $1,000 to your fund. The other major drawback when it comes to an IRA is the fact that you must begin receiving payments at the age of 70.5 from your account. You will also be heavily penalized if you make an early withdrawal from these funds.
Whether you choose a 401 (k) plan, a Traditional IRA, or both for your financial retirement investments, hope you will take the time to discuss the benefits and disadvantages of each with your financial adviser before making your final decision.
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