Feb 19

IRA vs. 401k

In a perfect world, you can contribute to both a 401k and an IRA account.  But, not everyone may be able to do this.  Here are some basics about each type of plan.  The focus is on traditional 401k and IRA plans.  This article gives you the who, what, where, when, why and how of each type of retirement plan.  Refer to the link for a more detailed description.

First, who can participate?  With a traditional 401k, you must work for an employer who offers the plan.  Employers may put limitations on who can participate and when.  For an IRA, most people under age 70 1/2 who earn an income can contribute to an IRA.  There are income restrictions on tax benefits however.

Next, what are they exactly?  Basically, they are two types of retirement accounts to encourage people to save for their futures.  As stated already, you can get a 401k through your employer.  Contributions are made pre-tax and taxes are deferred until you take distributions during retirement.  As for an IRA, you must personally sign up for one on your own (at many different financial institutions).  You may take tax deductions for traditional IRA contributions.  Roth IRAs are funded with already-taxed dollars.

Now, when do you take distributions?  You can take penalty-free distributions from both an IRA and a 401k once you reach age 59 1/2.  There are certain exceptions to doing this before you reach retirement.  Also, once you reach age 70 1/2, you must start taking required minimum distributions.  Note that Roth IRAs do not have RMDs.

Where can you put this money?  With an IRA, there are a multitude of things to invest in which include stocks and bonds, to real estate and small business ventures.  An employer-sponsored plan like a 401k are limited in the number of investments you can make.  Mutual funds from different asset classes and sectors are the most popular.

So why do contribution limits change?  From year to year, the IRS may deem it fitting to raise the limits based on inflation.  This does not happen every year and the amount may be different.

Finally, how much can you contribute?  This is a major difference between the two types of plans.  For 2013, you may contribute up to $17,500 to a 401k plan.  If you are at least 50 years old, you may contribute an additional $5,500 “catch-up” contribution.  For an IRA, the limit is $5,500 plus another $1,000 “catch-up” contribution for those at least 50.  Once you reach age 70 1/2, you cannot make any more contributions to a traditional IRA (you may still contribute to a Roth IRA).

These are two types of retirement options out there.  There are several more including the Solo 401k and the self-directed IRA to name a couple.  Not all plans may be available to you.  Further, certain plans may not be right for your situation.  It’s best to speak with a professional before starting your retirement planning.  Contact the tax experts at the IRA Financial Group to see what best suits your needs.

Nov 29

IRA vs. 401k

There’s always been a debate about which retirement plan is right for you…the 401k or the IRA.  Experts say that you choose based on your discipline, income and tax goals.

Many people will opt for their employee-sponsored 401k plan simply because it’s the easier option.  There’s nothing you have to do once you are enrolled.  The money comes right out of your paycheck (pre-tax) and as such, will lower your taxable income come year end.  Once you reach age 59 1/2, any distributions you make will be taxed at your current bracket.

On the other hand, one beneficial alternative is the Roth IRA.  Money contributed in this type of plan is already-taxed income, thus there is no tax write off.  The huge advantage here is that all distributions are tax-free once you reach age 59 1/2 and have had the IRA open for at least five years.

So of these two options, which is best for you?

With a 401k plan, you can contribute up to $17,000 for 2012 ($5,500 more if you’re at least 50 years-old) which is significantly higher than an IRA.  Also, your employer might match your contributions usually up to 6% of your annual income and at a rate of 50%.  Some downsides here are that your investing options are limited and fees could lower your investment dollars.

As for a Roth IRA, the max you can contribute for 2012 is only $5,000 ($1,000 more for 50+ year-olds).  Adam Bergman, a tax attorney with the IRA Financial Group, says the biggest advantage of this investment form is that your money grows tax free. With income tax rates expected to increase in the future, Bergman says this could be “potentially tax efficient.”  You are also in charge of what funds to invest in along with a substantially larger choice to choose from.  If you make more than $183,000 jointly you won’t be eligible to invest in a traditional Roth IRA. Bergman notes that since 2011 there are no income restrictions for a Roth conversion, which means you can make a traditional IRA contribution and then convert the funds to a Roth IRA, which would be subject to tax.

Therefore, depending on the amount of money you plan to invest each year and how hands-on you want to be will go a long way in choosing what’s best for you.  Ideally, you would have both types of plans so you’re ready for anything.  Read more at foxbusiness.com.
Contact a tax expert at the IRA Financial Group today to see where your money will earn the most for you.  Call us at 800.472.0646!