| Today's marketplace offers lots of choices in | | | | amount you may stash away. The amounts change |
| terms of retirement planning vehicles. The | | | | based on your age and the rate of inflation |
| 401(k) (or 403(b) for the nonprofit sector) | | | | (and the whims of Congress), but generally, |
| and Individual Retirement Account (IRA) are | | | | $2,000 is the limit for IRAs and |
| two of the most common. While they share some | | | | approximately $10,000 is the limit for 401(k) |
| similarities, the differences are more | | | | plans. Learn the rules and limits and consult |
| important for the impact they could have on | | | | with an adviser to learn how to maximize the |
| the growth of your retirement funds. However, | | | | tax advantages available to you. |
| though the differences are clear, the | | | | |
| question of which type of account is better | | | | Employee Benefit vs Individual Account |
| does not have a clear answer. As you will see | | | | |
| below, some features of the accounts may be | | | | The biggest difference is simply that a |
| perceived by some as advantages and as | | | | 401(k) is offered as part of an employee |
| disadvantages by others. Investment | | | | benefits package, while an IRA is owned and |
| preferences and retirement are personal | | | | administered by the individual account |
| matters, so you should weigh the options | | | | holder. This difference accounts for one of |
| carefully before you choose an account that | | | | the major advantages of a 401(k) over an IRA: |
| makes the most sense for you. In fact, if you | | | | your employer usually matches your |
| can afford to contribute to both types of | | | | contribution to your plan up to a given |
| accounts, you should do so to round out your | | | | percentage. For instance, if your contribute |
| investment portfolio. | | | | 2% of your pay to your 401(k) each pay |
| | | | period, your employer might match your |
| Tax advantages | | | | contributions, essentially doubling your |
| | | | money. For many people, this benefit alone is |
| The most obvious and impressive similarity | | | | reason enough to choose a 401(k) over an IRA |
| between a 401(k) and IRA is the tax benefit. | | | | if they must choose one or the other. |
| Money placed in both types of accounts is tax | | | | |
| free until you withdraw and use it. More | | | | Freedom of Choice |
| accurately, it is tax deferred. You defer the | | | | |
| tax until you use the money. The same is true | | | | There are also disadvantages inherent in the |
| for money earned by these accounts-until you | | | | company ownership of the 401(k). Because more |
| take it out, you don't have to pay income tax | | | | than one person owns funds in the overall |
| on the earnings. Recent tax law changes also | | | | account, a third party, usually an insurance |
| allow tax credits for certain types of IRAs | | | | company or other financial institution, |
| under specific conditions. Check with your | | | | administers the account. This results in less |
| tax professional to see if opening an IRA to | | | | freedom for you in administrative options, |
| take advantage of such credits would be | | | | such as changing, starting, or stopping |
| beneficial for you. | | | | contributions and in how your funds are |
| | | | allocated. For instance, company 401(k) plans |
| The tax benefits of an IRA are | | | | might offer 10 mutual funds to which you can |
| income-dependent. If you make more than an | | | | distribute your money out of the many |
| allowed amount in a given year, your | | | | thousands that are available. Because you are |
| contributions to your IRA may not bring any | | | | the sole owner and administrator of an IRA, |
| tax advantage at all. Furthermore, IRA | | | | by contrast, you can place the money in any |
| contributions may not be fully deductible if | | | | investment vehicle for which you're |
| you contribute to a 401(k) in addition to | | | | qualified. That freedom is essential for |
| your IRA. Once again, it is smart to check | | | | hands-on types who prefer to manage their own |
| with a tax professional so that you can plan | | | | affairs and accept credit or blame for |
| your retirement contributions to maximize | | | | success and failure. |
| your tax benefits. | | | | |
| | | | For some, this freedom is not an advantage at |
| There is also a down side to these tax | | | | all; some people do not want to trouble |
| benefits. If you withdraw money from your IRA | | | | themselves with asset allocation and mutual |
| or 401(k) before you reach age 59 (and one | | | | fund performance. If that describes you, a |
| half!), you will not only have to pay tax on | | | | 401(k) would better serve your needs because |
| the amount you withdraw, but will most likely | | | | your employer's plan likely has an account |
| be stuck with an early withdrawal penalty as | | | | manager watching its performance to maximize |
| well. The safest route is to not touch these | | | | security and returns. |
| accounts until you retire. If you must tap | | | | |
| these funds, do so only with the advice of a | | | | Whatever your preference, you are not limited |
| tax professional so you are not surprised by | | | | to one choice or the other. Many people have |
| unpleasant notices from the IRS come April | | | | both a 401(k) through their employers and an |
| 15. | | | | IRA. If you can afford it, contribute the |
| | | | maximum allowable amounts to both accounts. |
| Contribution Limits | | | | You'll enjoy the tax advantages now and will |
| | | | be better prepared for retirement in the |
| Because the money you put into retirement | | | | future. |
| accounts is tax deferred, the IRS limits the | | | | |