Plan and Retire

IRA vs. 401(k)

Erin Palmer

April 23, 2021

Couple saving money overtime

When you’re planning for retirement, there are a ton of options to choose from. IRAs and 401(k)s are both popular retirement account options to consider. You may even want to have a 401(k) and an IRA to really maximize your retirement savings!

Here is a breakdown of what these accounts are, the benefits of each, and how to choose the option that’s right for you.

What is an IRA?

The term IRA means individual retirement account or individual retirement arrangement. It is a type of retirement savings account that offers tax advantages.

There are different types of IRAs, each with its own set of eligibility requirements.

What is a 401(k)?

A 401(k) is also a type of retirement account with tax benefits. But the big difference is that 401(k) accounts are typically offered by employers to help their employees contribute some of their salary to save for retirement.

Benefits of IRAs and 401(k)s

Both of these retirement account types have plenty of benefits to consider.

Some of the major benefits of IRAs include:

  • Contributions are tax-deferred until you withdraw them
  • Flexible investment options
  • No employer participation is required to enroll in an IRA
  • IRAs are widely available and easily accessible for investing

Some of the major benefits of 401(k)s include:

  • Higher contribution amount per year than IRAs
  • Employer contribution match, when available
  • Most plans do not charge income tax on earnings until you withdraw money

IRA vs. 401(k): What to Consider When Choosing

Whether an IRA or 401(k) is right for you depends on your specific needs. Factors like your age, employment status, and the specifics of your job’s retirement offerings may impact your decision.

If you are employed and your employer offers a 401(k) program where the employer matches your contributions up to a certain amount or percentage, this will factor into your decision. Employer match programs are always worth consideration, as they can increase your contributions and help you save more over time. It’s basically free money!

If your employer doesn’t offer matching contributions, an IRA program might be more beneficial to you. One of the key benefits of an IRA program is the flexible investment options. An IRA will give you more control over your investments than most 401(k) programs. IRAs are also a great option to reinvest tax refunds.

Make sure you know the current contribution limits for 401(k) and IRA programs when you make your decisions, as these may change over time. Your employer will be able to provide the details for your 401(k) program and you can always find the latest contribution limits for IRAs on the IRS website.

Remember, you don’t have to choose one or the other! Some people choose to have a 401(k) and an IRA to maximize their retirement savings. It’s all about figuring out what works best for you.

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