Many people find all the available options for retirement planning to be quite confusing. This blog explains the difference between a Traditional IRA and a 401(k) account.
Speak to a Professional Financial Planner
I want to take this opportunity to encourage you to seek the guidance and advice of a professional financial planner. The resources and knowledge that a competent financial advisor can share with you will be invaluable when deciding how your retirement savings are put to work for your retirement.
Getting back to business, when it comes to financial retirement planning, you should find that both IRAs and 401(k) plans have strengths and weaknesses.
There are also limitations on how beneficial they can be when used with their regulations. Before leaping, every benefit that aids you in taxes and retirement should be considered carefully.
Understanding 401(k) Accounts
First, this plan offers a few benefits that are preferable to many over other retirement plans. You might want to consider that you can:
- invest up to 15% of your salary or a maximum of $20,500 per year (2022).
Of course, that assumes that your employer doesn’t have limits on how much you can invest. The money invested in your 401(k) account is pre-tax money, lowering the taxes you pay from each paycheck. Many people also find it far less painless to part with their money because it is taken from their checks before it arrives in their bank account.
Employer Contribution Match Programs
Second, the most important thing to consider is that many employers will match a percentage of your contribution up to a certain amount for each check. This boosts your investment that is well deserved and hard-earned as an employee. I hope you appreciate the implications it has on your future earnings. It would be best to keep in mind that the penalties for accessing these funds too soon are harsh to discourage this practice from occurring. Be sure not to over-invest in these funds to the point that you will need to access them in times other than emergencies.
Understanding Traditional IRA Accounts
Next, IRAs are another creature altogether. You will find much stricter limitations on Traditional IRAs than on 401(k) accounts, beginning with the fact that if your employer offers a 401(k), you must make very little money to qualify for the tax deductions that this particular retirement fund generally allows. The maximum yearly contribution for your IRA will be:
- $6,000 (as of 2022) or 100% of your annual income, whichever is lesser until the age of 49.
- Once you’ve reached the age of 50, you can invest an additional $1,000 in your fund.
The other major drawback of an IRA is that you must begin receiving payments at 70.5 from your account. You will also be heavily penalized if you make an early withdrawal from these funds.
The Bottom Line
Last, whether you choose a 401(k) account, a Traditional IRA, or both for your financial retirement investments, I hope you will take the time to discuss the benefits and disadvantages of each with your financial advisor before making your final decision.
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