Planning for your retirement is one of the most important things you need to address. When you retire you’re no longer working, and that means you need to think about how you’ll get by without any income. Two of the most popular ways of planning for retirement are through 401(k) plans and IRA accounts. These two investment vehicles feature different details and incentives in order to get people to save a portion of their income and set it aside for their retirement. Both IRAs and 401(k)s have their pros and cons, and if you’re going to choose one as your retirement planning strategy you need to be as informed about your decision as possible.
An IRA stands for “individual retirement account.” You can get access to an IRA either on your own or through your employer, but by and large IRAs are investment vehicles that you set up on your own. When you put money into an IRA, you are putting it into a fund which can then be invested in order to generate more cash. While you’re in charge of everything that happens with your IRA, you’re also on your own, and all the money that goes into it comes out of your income.
A 401(k) plan, on the other hand, is a very popular investment vehicle because it’s offered by employers who will often make contributions to your 401(k) based upon a certain percentage of your salary. Everyone likes the idea of their employers throwing in extra money to their retirement fund, so the 401(k) plan is easily one of the most popular investment strategies in America today. Like the IRA, 401(k)s have different tax issues which you need to be aware of. For example, if you’re making pre-tax contributions to your 401(k) or IRA you will have to pay taxes on your income later. If you make after-tax contributions to either one you’re going to have less money in your short term, but when you are legally able to access the money in your 401(k) or IRA it will be all yours, free and clear.
Both 401(k)s and IRAs are meant to be spent only when you retire. So, if you access the money in either account before you reach the legal age to withdraw the money, you will be heavily taxed and penalized for early withdrawal.
To learn more about 401(k)s and IRAs, make to sure to read through the different retirement accounts to decide which one is right for you. Also, by speaking to a financial advisor you will get more in depth detail about the different retirement accounts that are available to you.