How to Decide Between an IRA and 401(k)

Planning your finances for your retirement years? You are going to need the proper savings to get you there.

Two key types of accounts to help save for retirement are the IRA and 401(k). Here is what you need to know about the two accounts, including their differences.

What Are These Savings Accounts?

The IRA and 401(k) are tax-advantaged savings accounts, which help to accrue funds going toward financing your retirement years.

Financial planning firms like Mooney Lyons can help set these accounts up with you. While both accounts can be held simultaneously, each helps with your retirement planning differently.

IRA and 401(k): What’s the Difference?

The IRA and 401(k) are the most common types of savings accounts for retirement planning.

The 401K is typically opened through an employer while the IRA is an optional investment account that can be opened anytime. Additionally, the 401(k) has benefits like matching plans while the IRA relies solely on the amount you put in it. Both account types are used to save in the long run.

401K

A 401K is an employer given retirement plan, which includes the perk of a matching contribution. Employers tend to match funds up to a low percentage of the amount you placed in a 401(k) account. This allows you to earn money for retirement at a higher rate.

Additionally, the funds are pre-taxed, so you only need to pay tax when you decide to draw the funds. That is likely going to be in retirement. Employees with a 401(k) can place up to $18,500 in pre-tax income in the account prior to retirement.

IRAs

An IRA stands for an individual retirement account. This type of account allows the account holder to save for retirement by earning on investment vehicles such as CDs and stocks.

Types of IRAs – Roth, Traditional, and Simple

There are a variety of IRA accounts, and it is important to know about traditional IRAs and Roth IRAs. Other types of IRA accounts include Simple IRAs, which work well for small business owners.

Traditional IRA

Funds placed in a Traditional IRA are not taxed when you put them in the account. However, you will need to pay tax when you start withdrawing the money from the account.

Roth IRA

Funds placed in a Roth IRA are already taxed when you place them in the account. Those funds will not be taxed again, so you can enjoy withdrawing them in retirement without any worries.

Simple IRA

These accounts are intended for small businesses. Simple IRAs will allow you to add funds you’re your employers matching a percentage of the contributions. The funds will not be taxed until you start withdrawing money from the account.

Can You Have an IRA and 401(K)?

It is possible to hold both kinds of accounts. An IRA can be opened at any time, but a 401(k) needs to be provided through an employer.

Comparing the Two: IRA and 401(k)

The 401K is a more exclusive option when comparing the two accounts since it is tied to employment. Nonetheless, both accounts can be used for retirement planning.

Both account types have subtypes, which include traditional and Roth accounts. The standard advice is that a traditional account is a better option when you are in a higher tax bracket. The Roth account works to your advantage if you are in a lower tax bracket.

Ask our advisors at Mooney Lyons for help setting up these savings accounts that will secure you for your retirement. Contact our advisors today.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

The opinions voiced in this material are for general information only and are not intended to provided specific advice or recommendations for any individual.

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