Individual Retirement Accounts (IRAs) and 401k plans are two of the most widely sought after options you can opt for when it comes to retirement planning. This may not come as a surprise to many considering they both offer tax benefits and come with flexible contribution options. Actually, you will not dread IRA contribution limits from the word go.
Even though most people choose to go with one type of account, it does not mean you need to pick just one. In this post, we will take you through some of the differences between IRA vs. 401k.
Taxation Withdrawals
One of the biggest differences that exist between a traditional IRA and 401k plans is in the taxation of withdrawals. With a traditional IRA, owners have to pay income tax on the money they withdraw in the year they take. If this is not enough, the taxable withdrawals are subject to a 10% early distribution when the saver is under 59 years of age.
As for 401k plans, employees have to pay the income tax on the pretax employer contributions, employee contributions, and earnings you withdraw from the 401 (k) in the year you take the withdrawal. Be sure to understand the difference that exists between traditional IRA vs. Roth IRA.
Eligibility to Participate
When it comes to traditional IRA, any individual with earned income and under age 70 and a half may contribute. However, the income limits apply to receive a tax deduction of the IRA owner is taking part in an employer’s retirement plan. As for the 401(k) plan, the employer can set a certain age or length-of-service requirements the employee should meet to participate.
The Bottom Line
Even though there are other retirement plans you can opt for, most people seem to prioritize IRA and 401k plans. If your main intention is opting for the IRA, then you need to start by understanding what is an IRA. It is then that you can choose the best IRA accounts you can count on.
Now that you know some of the differences that exist between IRA and 401 (k), you can choose the best retirements plans hassle-free. Be sure to do your due diligence and examine the pros and cons of each option. Do not shy away from asking any questions you might have in mind whether you are interested in the best mutual funds, Roth IRA, or traditional IRA.