Main differences between 401(k) and IRA accounts

Retirement may seem far away, but planning for it is fundamental for our future. Pensions are becoming non-existent, so it’s important to start thinking of other options as soon as possible. 

When we talk about retirement, there are usually two popular options that come to mind. The first one and the most recognized one is the 401(K). The second one is the Individual Retirement Account or IRA.

These accounts, which are the two most common contribution plans to retirement, have their differences, and it’s important to understand them to choose the right fit for you.  Surprisingly, some people manage to have both of them

 About an IRA account

An Individual Retirement Account, or an IRA, gives anyone, under the age of 70,  the opportunity to contribute to their retirement. It allows an individual to save for retirement with tax-free growth or on a tax-deferred basis. 

The 3 main types of IRAs each have different advantages:

•    Traditional IRA - You make contributions with money you may be able to deduct on your tax return, and any earnings can potentially grow tax-deferred until you withdraw them in retirement. Sometimes, retirees find themselves in a lower tax bracket than they were in pre-retirement, so the tax-deferral means the money may be taxed at a lower rate.

•    Roth IRA - You make contributions with money you've already paid taxes on (after-tax), and your money may potentially grow tax-free, with tax-free withdrawals in retirement, provided that certain criteria are met.

•    Rollover IRA - You contribute money "rolled over" from a qualified retirement plan into this traditional IRA. Rollovers involve moving eligible assets from an employer-sponsored plan, such as a 401(k) or 403(b), into an IRA.

About 401(K) accounts

401(K) accounts can be opened through employers only. There’s a qualification requirement that needs to be fulfilled in order to be considered. This plan is a company-sponsored retirement account that employees can contribute to. Employers may also make matching contributions.

Note: Some employers may not offer this retirement plan, though and if yours doesn’t, you can always do a Roth IRA.

Many employers tend to offer matching contributions when you open a 401(K). For example, if your employer would match your account contributions up to seven percent of your income, you should never contribute less than seven percent yourself. If you do contribute less than that, then you would be turning down some free money, which you wouldn’t want to do.

To conclude:

If you take control of your future now and start planning for your retirement, you will be grateful for it later on in life.  Unfortunately, some of us may have to work for some additional years, or even for a lifetime period, but we all would like to be able to retire someday.  That’s why it’s very important that you start thinking about your retirement plans as early on in your life as you can.
 

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