Did you know that only 33% percent of Americans have an IRA? An IRA is a smart way to save for retirement, but it’s not your only option. In fact, when it comes to investing in a nest egg to ensure a financially secure retirement, there are several different types of retirement plans for you to choose from.
Another common option is the 401k. But what’s the difference? And does it really matter?
Explore the benefits and differences between an IRA vs 401k in the post below.
What is an IRA?
IRA stands for an individual retirement account. An IRA is a tax-deferred retirement savings account that is established by an individual person. The account holder is allowed to own many different assets within the individual retirement account.
Types of IRA include:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
The main difference between these types of IRAs is that you can only open a SEP IRA or a SIMPLE IRA when it is offered by your employer. The Traditional IRA and Roth IRA are available without sponsorship from the employer. However, you or your spouse must have earned income.
What is a 401k?
Now that we understand what an IRA is, it’s time to explore the 401k. A 401k is a retirement savings account that is offered by your employer. If your employer offers a 401k, it’s a good idea to contribute, especially is they offer a 401k match.
A 401k match is a benefit that many employers offer to their employees. Employers will often match an employee’s contributions to their 401k up to a certain percentage of the employee’s salary.
For example, your employer may offer a 100% 401k match up to 2% of salary. The company match incentive is huge for a 401k owner. This is a great opportunity to have extra money added to your retirement account without taking it out of your paycheck.
IRA vs 401k
So are you only invested in a 401k? Maybe it is time to reconsider your 401k now that you understand some of the benefits of an IRA. The question of which is better — IRA vs 401k — is quite common, and everyone’s financial situation is different.
A 401k is typically good if you’re receiving an employer match. If your employer does not offer a 401k matching option, you may be better off starting your own traditional IRA or Roth IRA account.
In a Roth IRA your contributions are taxed upon entry and then the earnings grow tax-free but you pay no taxes upon withdrawals in retirement.
In a 401k the investment income accrues and compounds tax-free over time once invested by the individual or the company. 401k money withdrawals are then taxed at the normal tax rate upon withdrawal after the age of 59 and a half or older. A traditional IRA works essentially the same way.
Start Saving for Your Retirement Today
Now that you know the difference between IRA vs 401k, you’re ready to start saving for your financial future!
If you enjoyed this post read others on our blog to continue to learn about everyday finances and more.
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