401k vs. Individual Retirement Accounts

Like cars, retirement plans have a lot of different makes, models, and add-on features. The most common retirement accounts are the Individual Retirement Account (IRA) and the 401k.

What is a 401k?
A 401k is an employer-sponsored retirement account. Typically, the employer offers to match some of the funds you contribute as an added benefit to your employment. For example, you may elect to have 3 percent of your salary put back for retirement, before tax, and your employer may match a certain percentage of your contribution, such as 2 percent. You should always contribute at least what your employer matches or else you are turning down free money. The money you contribute to your 401k is pre-taxed money, meaning you do not pay tax on the money until you withdraw it during retirement.

What is an IRA?
While 401k accounts are only offered through employers, anyone under the age of 70½ can contribute to a Traditional IRA through a financial institution. Like a 401k, the funds you place in a Traditional IRA are not taxed until they are withdrawn. However, there are no fund matching incentives.

With a Roth IRA, you pay tax on income before you make your contribution but pay no tax on your earnings when you withdraw the money at retirement. In order to qualify for a Roth IRA, you must have an adjusted gross income that is less than $116,000, or $183,000 for married couples filing jointly.

Maximum Contribution Levels
While both 401ks and IRAs offer tax advantages, they have different contribution level limitations. The employee contribution limits of 401ks are three times higher than those of IRAs. And if you happen to be over the age of 50, you can also add in the catch-up contribution to your total.

2015 Maximum Contribution Levels
IRA 401k
Basic Limit $5,500 $18,000
Catch-Up Contribution Limit for those 50 and Above $1,000 $6,000

If you would like to learn more about retirement accounts or get help planning for your retirement, please contact me. The earlier you start planning, the longer your contributions have to grow.  As you can see, both options have great benefits. The good news is, you don’t have to pick one or the other. Participating in both allows for a diverse retirement plan that ensures your nest eggs aren’t all in one basket.

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