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