401k Vs IRA
IRAs and 401ks are two similar ways to save for retirement. There are advatages and disadvantages to each of these two plans. But which plan is actually the better plan?
Well, let’s take a look.
The maximum 401k contribution limit is much higher than the IRAs. That makes a 401k a better plan if you have a lot of money to invest with. The big different is how much they let you contribute could be pretty important in the future.
There is also another big advantage for a 401k, and that is that some employers will help you out by depositing monre money into your account for every $1 you invest. If your employer matches you $1 for $1 and you put in $1,000 then you will get another $1,000 put into your account. Because your employer does not organize an IRA it doesn’t come with this added benefit.
The IRA also has a few advantages. While both of these plans offer a way to get a tax deferred income the IRA can offer something else. There is one IRA plan called the Roth IRA that offers something different.
In a Roth IRA you will get taxed on any money you deposit, but it will be able to grow tax free and when you take it out you will also not have to pay any taxes on it. You may be in the lower tax bracket when you retire, or you may believe the tax rate will go down. If that is the case then this may be a better option.
The other advantage IRA accounts have is that they allow you to manage your account yourself. What this means is that it is possible to get a much higher growth rate then if you had simply invested into a professionally managed 401k.
There is one big disadvantage to both of these plans. Both the IRA withdrawal rules as well as the 401k withdrawal rules do not let you take money out early without taking a penalty on it. Of course that is because they are suppose to be for retirement, but it can still hurt a little if you need the money now.
