In addition to resolutions, the New Year signals that it is time to prepare for another tax season. For some, that means deciding how to spend a hefty refund. For others, tax season brings the grueling task of finding receipts and ledgers. However, it is time for many people to decide on which retirement plan is best for them. Continue reading if you need to decide between a 401(K) and an IRA (individual retirement account) and want to know the differences between these two tax-saving plans.
Knowing the difference between a 401(K) and an IRA can make a difference in the amount you can put away for your savings. Listed below are five key differences between a 401K and IRA.
Unlike an IRA, a 401(K) is a type of savings plan that involves your employer contributing a portion of your pay to your savings or retirement fund. Although some companies make their employees work for them for a specific time, many start contributing to the 401(K) as soon as they start working. The money being deducted directly from the paycheck makes IRA and 401(K) different.
The amount an employee under 50 years of age can contribute to their 401(K) is $20,500. Those older than 50 can put in an additional $6,500. Payroll deductions make it easier to contribute without missing the money. Another huge benefit is that the money is deducted from your paycheck before taxes, which means less money you are paying taxes.
You can save for retirement with an IRA account if you have an earned income. An IRA is set up at a bank or financial institution. However, one caveat of an IRA is that you must have an income to open the IRA. You can also contribute to your spouse’s IRA if they do not have a job.
There are two types of IRA accounts, including the popular traditional and the Roth IRA.
For a traditional IRA, money can be contributed pre-tax. Money grows in a traditional IRA, but you are taxed if you take withdrawals. Contribution limits exist, as you are not permitted to annually contribute more money than what you made during the year. In a traditional IRA, you may also start withdrawing from it after the age of 72.
There is no age limit for opening an account with a Roth IRA as long as you have an earned income. There is also no mandatory withdrawal date and you can continue to watch your account grow, even after you’ve retired. Another benefit of a Roth IRA is that it can be passed down to heirs.
This year brings changes to tax laws making it possible to increase contributions to 401(K) accounts from $19,500 to $20,500. That means that you can save $20,000 tax-free dollars from your paycheck annually.
One major benefit of signing up for your employer-sponsored 401(K) is that most employers will contribute to your plan. Many employers will contribute between 2% and 10% more for their employees. That is basically free money that your job is giving you in addition to your paycheck. That also means that when you get ready to retire, you will have more in your 401(K) account than you actually put there yourself.
When you have to withdraw early from your accounts, it’s most likely because you need the money. The difference between the two is that when you withdraw from your 401(K) plan, you pay a 10% penalty and income taxes on what you withdraw. However, with an IRA, you only pay a penalty on what is withdrawn. However, if you want to get in on the silver rush, you can roll money from a 401(K) to an IRA and from there purchase silver. A silver pricing table will show how much your investment will cost and make you.
As you have read, the season when making decisions regarding saving money is here. Many people put aside money by taking advantage of their company’s 401(K) programs so that they can get their contributions matched. Others take advantage of putting money into IRA accounts. You will see above the five key differences between the two types of retirement savings plans to see what will suit you and your family best.