IRA vs 401K – Is One of The Plans Really Better Than The Other?

IRA vs 401K

There are two distinct retirement plans that can give you a return on your investment and an income for the future. One is an IRA and the other is a 401K. Both have benefits for savers, but there are also differences. When discussing the advantages of an IRA vs 401K plans, look to maximum contribution limits, individual vs employer plans, investment options, and matching employer contributions.

Maximum contribution limits constitutes the differences between the two retirement accounts. Each account has a maximum you can contribute. A 401K allows you to contribute more to your account every year than does an IRA. As an example 401K contribution limits are $15,400 per year or $22,000 a year if you are over fifty. You can only contribute a maximum of $5,000 or $6,000 a year to an IRA account.

Another difference with IRA vs 401K is who offers these accounts. You get 401Ks from an employer but with an IRA you need to set it up on your own and manage it by yourself. Self-employed individuals can set up solo 401Ks, but the majority of 401K plans are through employers and you can take advantage of matching contributions from your employer. In addition to the money you directly contribute into your 401K is the employer’s contribution to this account. An IRA account does not have matching contribution provisions.

IRA vs 401K plans do have various security and investment options. You can put the funds into bonds, stocks, or mutual funds. IRAs have more investment choices, but 401Ks only have a few types of secure investment sources where monies are stored.

To better understand IRA vs 401K, you need to know that there are two types of IRAs; traditional and Roth named after the late congressman who set up the fund. The Roth IRA eligibility has an income limit of $120,000 a year for individuals and $175,000 for couples. If your earnings become higher than those limits you will no longer be able to contribute to a Roth IRA. There are no income limits when contributing to a traditional IRA. Both IRA plans have a yearly limit of $5,000 or $6,000 contribution. Roth IRAs will be taxed upon contribution while traditional IRAs are taxed at withdrawal. The traditional IRA vs 401K carries the same 10 percent early withdrawal penalty but a Roth IRA can be withdrawn any time after the fund has sat for five years. In order to determine the best IRA accounts for you, add up the cost savings between early withdrawal and tax penalties and taxed contributions.

If you are looking to maximize your retirement dollars, a no fee Roth IRA can be ideal. You have the option of contributing up to $5000 in this IRA and if you find the right broker you will have no set up or administrations fees for a period of time. IRA vs 401K plans provide you with retirement security, but if you are looking for no-age limit withdrawals, and the opportunity to invest in multitudes of funds one type of IRA is best. If you are not good at saving, direct contributions from your paycheck into your 401K plan can be ideal.

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