IRA vs 401k ? Crucial Differences to Help You Plan Retirement

For some people, retirement years conjures up visions of enjoying the things you have always wanted: driving around the country in an RV, going to see the world and places you?ve always wanted to visit but have never had the time to visit. So, planning your retirement is crucial if you want to enjoy it.

So, the question actually is ?which retirement plan should you choose?? IRA, 401K or both? These two retirement plans while different are both advantageous. So, please take a careful look at both options before making your choice.

IRA Retirement Plan

IRAs can be either traditional or Roth. A traditional IRA retirement plan often requires you to fund the plan outside of your workplace. People within a certain income bracket stipulated by the government qualify for this.

The good thing about a traditional IRA is that your retirement funds are either fully or partially tax deductible depending on how much you earn. These taxes are deferred until you start taking out of your retirement funds. Once you do, it becomes your income and income taxes apply.

Roth IRAs on the other hand involve making initial investments with money that can be taxed. Investors are also unable to immediately access the funds anytime they need it. However, Roth IRAs are very popular because there is no tax on the account as it grows.

And when you retire, you can start withdrawing from it, without worrying about taxes as it is tax free. This option is best for those who think that their taxes are likely to go up when they retire and for people who want a wide variety of investment opportunities.

401K Retirement Plan

Unlike the IRA that can be accessed by people within a certain income bracket, 401ks can only be accessed by employer-sponsored contributions. In essence, it is a retirement plan that you can only partake in if you are employed by a company.

While you contribute and your account increases, your funds are tax free and without any duties. The tax is generally deferred until retirement when you start withdrawing the funds. Some employers often pledge to match their employees 401K contributions.

So, if you contribute $500 every month, your employer will also pay $500 into your 401k; making it a total of $1,000 contribution monthly. This is about the best 401K plan you have as you have a 100% ROI.

Should You Do Both?

Yes, you can. While you can choose either of the two plans, you may also want to consider combining the two plans. As long as you don?t go beyond the yearly maximum contributions and income requirements, you?ll be fine. To find out if you qualify to do both, check the IRS website for the latest requirements and information.

The guys and gals over at Mint.com tell us why we should have both a 401k and an IRA

• You can ?tax diversify? by having both a 401(k) and a Roth IRA
• Your current 401(k) doesn?t allow incoming rollovers, and you have an old 401(k) (or two, or three) to consolidate
• You?ve maxed out your 401(k) and still have more money to save

PS:? You?ll notice that I have purposely excluded income guidelines and limits from this article.? This is because the numbers change yearly and it is best to check the IRS website on limits around contributions and tax brackets.

Source: http://www.girlsjustwannahavefunds.com/ira-vs-401k-retirement/

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