Distinguishing Between IRA and 401(k)

A retirement account should be one of your most important financial goals during your career. There are many different types of retirement account, but the two most common are Individual Retirement Accounts IRAs, and 401(K). While they may seem similar, there are many differences between them. You will need to know the pros and cons of each account type before you decide which one to open. You may be tempted to open a retirement plan, but it is important to weigh the pros and cons of a Roth IRA or 401(k). It is important to understand the pros and cons of both a 401(k) or IRA once you’ve chosen one. There are several things to consider when deciding whether you want an IRA or a 401k.

IRA Vs. 401(K)

What is an IRA?

IRAs are tax-deferred accounts for retirement savings, meaning you can invest your pre-tax earnings. You are taxed on your IRA earnings only after you withdraw them at retirement age, which is currently 59 1/2 years. You can withdraw your money early, but there are penalties which will significantly reduce your earnings.

You can open a IRA account at a bank or brokerage firm. Your employer does not have to help you set up an IRA. IRAs are similar to individual bank accounts and offer many options for the finer details of your IRA. IRAs allow you to invest in stocks, bonds, real estate and other assets.

The maximum annual contribution to an IRA is $6,000. People over 50 years old are allowed an extra $1,000. This is a catch-up case. IRAs offer a great option to anyone looking for a flexible investment account with pre-tax income.

IRA

Regular IRAs and Roth IRAs are the two main types of IRAs. Roth IRAs are based on post-tax income. The type of IRA you choose will depend on whether or not you prefer to use pre-tax or post-tax earnings for your retirement account. Both types of IRAs offer tax benefits. Which IRA is best for you depends primarily on your income. Your tax liability will also depend on whether it increases or decreases in the future.

401k

A 401k, like an IRA is a tax-deferred retirement account. The main difference is that a 401k plan is sponsored by your employer. Your employer will set up your 401k for you. You can then invest a part of your salary into the account.

Your 401k plan will invest your contributions in a variety of different investments. The majority are typically invested in funds selected by your employer or sponsor. Employees’ risk tolerance is usually the deciding factor in choosing a mutual fund. The investments you make will accumulate tax-free over time.