Should You Invest in a 401(k) or an Individual Retirement Account? Know Your Choices
With the economy fluctuating intensely, it’s time to buckle up and make smart retirement investment choices to secure your financial future. It is because who would like to spend their golden years of retirement eating soggy ramen noodles?
You must start preparing now to secure your retirement fund by choosing a plan that promises the most tax benefits and investment flexibility.
Below is a brief discussion on 401(k)s and Individual Retirement Accounts (IRA) to assist you in making a wiser financial decision:
So, what are 401(k) and IRA retirement plans?
A 401(k) is a tax-advantaged plan sponsored by employers for their employees. It allows employees like you to save some of their pre-tax income annually.
On the contrary, an IRA is a retirement account that you can open without an employer and provides multiple tax benefits with your company’s involvement.
There are two types of IRAs available that every real estate investor should know about, traditional and Roth.
A traditional IRA offers the advantage of making contributions with pre-tax dollars while deferring taxes until you withdraw during retirement. On the other hand, Roth IRA contributions are backed up by post-tax dollars, but eligible withdrawals in retirement are exempt from taxes.
Key Differences Between an IRA and a 401(k) Plan:
We have gathered the differences that make IRA and 401(k) plans unique in their ways:
Investment Flexibility: As you select a retirement plan, flexibility should be an essential factor to consider.
Both plans offer a range of investment options, but the 401(k) plan stands loose in front of the IRA due to its limited choices. It is because investment through 401(k) plans depends on the employer, while IRAs can be operated individually. Therefore, IRAs offer multiple investment opportunities in many profitable assets.
Contribution Limits: There is a certain limit set to save funds annually so that high-paid workers don’t take undue advantage of tax benefits. The deposit limits are mentioned below:
IRA (for below 50 years): $6000 annually
IRA (for 50 years and older): $7000 annually
401(k) (for below 50 years): $19,500 annually
401(k) (for 50 years and older): $26,000 annually
Tax Benefits: You can enjoy multiple tax benefits while saving with a 401(k) and IRA.
If you save with an IRA, you can defer your taxes until you withdraw funds during your retirement. But a 401(k) savings plan allows you to save on income tax by making your contributions pre-taxed.
Withdrawal Rules: There are some set withdrawal rules for both plans. Knowing these rules can allow you to save on penalties if you plan to withdraw your funds earlier than your expected retirement.
One of the withdrawal rules for a 401(k) plan is that if you withdraw funds before age 59 ½ funds, you may face a 10% penalty. On the other hand, an IRA allows for penalty-free withdrawals at any time.
Costs: Next up is the potential charges you need to incur. IRA and 401(k) plans have associated fees and costs.
An IRA plan requires you to pay annual fees while saving with a 401(k) plan requires you to pay investment management fees, which are slightly lower than IRA fees.
It’s Time to Make a Decision Now!
The IRS plan will be better if you want greater flexibility with fewer costs. If you wish to take full advantage of your tax benefits, a 401(k) plan might suit you better.
This early planning and wise investment habit will be one of the greatest decisions you make to prepare you for a carefree and happy retirement life.
About Ryan Whitefield
Ryan Whitefield is a real estate investor and mentor with a diverse experience of more than 20 years. As the founder of REVILO Property Group and co-founder of Carlton James Group, Ryan is on a mission to transform and simplify real estate investments. His early years in construction fueled his desire to leverage the recession-free benefits of the real estate industry. After building and flipping over 500 homes, Ryan repositioned his skill set as an educator to enable other investors to earn financial independence through large-scale multifamily properties. By educating amateur investors on self-directed IRAs, he plans to diversify residential and commercial real estate and build a solid financial future for his investors.
