The Difference: 401K and Roth IRA
Retirement accounts are integral to many American’s futures. But how do you go about choosing the right one for you? Both Individual Retirement Accounts (IRA) and 401K plans offer their share of benefits while also containing very different restrictions. The short answer is that you may end up choosing both, but understanding what each can do is important to enjoying a long retirement.
To begin, you must understand that the 401K plan is the typical retirement plan offered by employers.
A 401K plan is a simple retirement plan whereby the employee designates a certain portion of their salary to be moved into the 401K plan, to which the employer may match up to a certain percentage. Money set aside for a 401K plan typically grows through a combination of investments either in the stock market, mutual funds, savings accounts, or various other investments.
Some employers may match as much as 50 cents on the dollar, for up to 6 percent of contribution to a 401K, essentially adding free money to your retirement plan, according to Financial Web. However, some worry that when changing employers, what becomes of the 401K plan held with the former employer? Provided you cannot move your plan over or leave it with your old employer, an alternative may be to choose to roll over the 401K into an IRA, which will save you previous dollars in taxes, and give you another alternative to saving for retirement.
Unlike the 401K, IRA’s do not have employer participation, and are all up to you in terms of the amount saved and where that money will be invested. With an IRA, the money you put away will be taxed now and not in the future.
Many looking to begin retirement savings will have both a 401K and an IRA in order to exploit the benefits of each. With a 401K the money being set aside is not yet taxed, however, your employer may put limits on where that money can be invested, essentially putting them in control. IRA’s have fewer regulations in that vein while a typical 401K may also restrict the amount of money movement among investments over a certain period of time.
The last difference between the two retirement accounts is access. With a 401K the account holder can borrow money, of course with the eventual intention to pay it back, with no penalty, which is not possible with an IRA.
According to CNN Money, relying on multiple retirement accounts as opposed to one over the other keeps the taxing diversified, thus avoiding heavy taxation at either the beginning or end of your investing.
Of course, no matter how many different ways you choose to save for retirement, as long money continues to be put away, utilizing both an IRA and 401K will be the key to a much happier and, financially speaking, safer retirement
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