Many people find all of the options available for retirement planning to be quite confusing. If you are one of those people, this article will explain the differences between a IRA (Individual Retirement Account) and an 401K plan.
During your research, you will come across many terms that will be somewhat confusing until you get the terminology down. The road to financial success does not have to be as difficult as we make it out to be.
Encouragement
I'd like to take this opportunity to encourage you to seek the advice of a professional financial planner. When it comes time to make the decision that will affect how your retirement savings are put to work for you, the resources and knowledge that a competent financial advisor can share with you will be invaluable. We go to a mechanic for mechanical advice (at least, I do), so it stands to reason that we would go to someone who has received financial training for financial advice.
Back to business
To return to business, when it comes to financial retirement planning, both IRAs and 401 (k) plans have advantages and disadvantages. There are also limitations to how beneficial they can be when used in conjunction with one another, as well as limitations to their own use. Before you jump, carefully consider every benefit that will help you with taxes and retirement.
First we look at the 401K plan
This is a plan that provides a few advantages that many people prefer over other retirement plans. The first thing you should think about is that you can invest up to 15% of your salary, or a maximum of $15,000 per year (as of 2006). Of course, this assumes that your employer does not have any restrictions on how much you can invest. Because the money invested in your 401(k) account is pre-tax money, it reduces the amount of taxes you pay out of each paycheck. Many people also discover that because the money is deducted from their checks before they arrive, it is far easier to part with.
As someone who has spent years watching taxes, FICA, and Fido take my money, I can say that it is no less painful for me, but some people find it comforting, which is a real benefit. Finally, and perhaps most importantly, many employers will match a percentage of your contribution up to a certain amount per check. As an employee, this is a well-deserved and hard-earned boost to your investment.
I hope you understand the implications for your future earnings. You should keep in mind that the penalties for accessing these funds early are severe in order to discourage this behavior. Take care not to over-invest in these funds to the point where you will need to access them in situations other than life-threatening emergencies.
IRAs are a completely different creature
IRAs have much stricter limitations than 401K plans, starting with the fact that if your employer offers a 401K, you must make very little money in order to qualify for the tax deductions that this type of retirement fund generally allows. Up until the age of 49, the maximum yearly contribution for your IRA will be $4,000 or 100% of your annual income, whichever is greater. You can contribute an additional $1,000 to your fund once you reach the age of 50. Another significant disadvantage of an IRA is that you must begin receiving payments from your account at the age of 70.5. You will also be heavily penalized if you withdraw from these funds too soon.
Take time
I hope you will take the time to discuss the benefits and drawbacks of each with your financial advisor before making your final decision, whether you choose a 401K plan, a Traditional IRA, or both for your financial retirement investments.
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