Difference Between a 401K vs. IRA | First American Bank

Difference Between a 401K vs IRA

401K vs. IRA

Saving for retirement can be complicated. If you are choosing between a 401K and IRA, learn what each offers to see what's right for your future.

401K

A 401(k) is a qualified employer-sponsored retirement plan, If your employer offers access to a 401K + company matching, that can be a great place to start

IRA Traditional

While a 401K is limited to people employed by companies that offer those plans, anyone can contribute to a traditional lRAas long as they are under the age of 70 94, A traditional IRA offers tax-deferred growth on your investment, allowing all of your money to grow until you are ready to withdraw.

IRA Roth

A Roth IRA offers the opposite tax benefit from a traditional IRA. You pay income tax as you deposit the money, but then pay no tax when you withdraw in retirement, A Roth IRA is income-restricted, so you may only contribute if you make less than $135,000 for single filers and $199,000 for married couples filing jointly.

2018 Contribution List*

401K

  • $18,500 for those under age 50
  • $24,500 for those ages 50+

IRA

  • $5,500 as a combined IRA limit
  • $6,500 ages 50+

Taxation

401K

Contributions are made with before-tax dollars. Withdrawals (in Retirement)are subject to Federal and most Stale income taxes

IRA

Contributions are made with after-tax dollars Withdrawals are not taxed, provided it’s a qualified distribution:

  • First time home purchase
  • On account of disability
  • On or after death
  • On or after age 59 1/2

Advantages

401K

  • Simplicity. All your retirement savings in one place.
  • Employer match (if altered)
  • Eligibility is not limited by income
  • High annual Contribution limit

IRA Traditional

  • Greater investment Selection
  • Not limited by where you work

IRA Roth

  • Greater investment Selection
  • Qualified withdrawals are tax free in retirement
  • Money can be withdrawn at any time

Disadvantages

401K

  • No control over plan and investments choices
  • Distributions in retirement are taxed as ordinary income, unless in a Roth 401K
  • Required distributions begin at age 70 1/2

IRA Traditional

  • Limits are less than 401K
  • Distributions in retirement are taxed as ordinary income
  • Required distributions begin at age 70 1/2

IRA Roth

  • Limits are less than 401K
  • No immediate tax benefit for contributing
  • Income-restricted, the ability to contribute caps out at higher incomes

Next Steps

Set up a 401K account if your employer offers it with matching contributions (and meet the matching at the minimum at least). Otherwise. start with an IRA to have the most investment flexibility. If you max out the IRA limit and still have access to a 401K (but without matching) contribute as much as you can at that time for the pre-tax benefit it offers.

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