Differences between a 401k and an IRA

Differences between a 401k and an IRARetirement is not something you want to leave to chance. You certainly don’t want to depend on the government to keep Social Security afloat do you? You need to begin planning for your retirement now. You have a few choices when it comes to saving for retirement. You can choose between a 401k or an IRA. The rest of this article will discuss the highlights of each retirement account.

401k basics

401ks are typically provided by an employer. Many employers have qualifications that you have to meet before you can contribute to one. You may have to be a full time employee instead of a part time one. You may have had to work there for a certain amount of years. Basically this account is seen as a benefit that the company provides. The way a 401k works is that you  pay through tax deferred payroll deductions (come out of your paycheck). Many employers even match the contributions. There is a penalty if you withdraw before age 59 ½.

A 401k is different from an IRA in that it has higher contribution limits. Now let’s discuss some points about IRA accounts

IRA basics

There are two types of IRAs – Traditional and Roth.

Here are the basics facts about each one.

Traditional – anyone who works or receives alimony can open one. not tied to an employer

You can claim a tax deduction for contributing to traditional IRA

Contributions must stop after age 70 ½

Roth IRA

Funds must be held for 5 years before a withdrawal is made.

There is a limit to how much your income can be to be able to contribute.

Contributions can be made no matter how old you are.

Retirement planning is serious business. It is highly advised to seek competent advisors when you you are planning for your retirement.

For more information go to the IRAs website and consult Publication 590 for information about IRAs.  For more information about 401ks consult Publications 525, 412, and 413.

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