What is the difference Between IRAs and 401k’s?

401k vs IRA

IRA’s vs 401K’s

 

The landscape of retirement products is a confusing one. Many different types of accounts exist, each containing different strategies and a number of financial products to buy. It’s a landscape that’s difficult to navigate for anyone outside of the finance industry. But this is your retirement on the line and you need to be informed. IRAs and 401k investments actually aren’t that difficult to understand either. Here are a few tips for deciding which retirement option is right for you.

Tax-Deferred Retirement Accounts

The IRA OR 401K investments  account similar to a bank account, except you can buy financial products and hold them in it. Money is deposited into the account and you can buy stocks, mutual funds, or any other number of assets. But there’s one very important difference for these types of accounts – taxes.

When you put money into your bank account, you’re using cash from your paycheck that’s already been taxed automatically. If you keep your money in the account for a long time and earned interest, you’ll be taxed on that as well. With IRA OR 401K investments, you hold off the tax man until later. The money deposited into your IRA OR 401K investments comes out of your paycheck before taxes are levied. This tax-free deposit is used to buy financial products and after it’s all said and done, you’ll pay your taxes.

Key Differences

IRAs and 401ks operate pretty much the same way but live under different rules. First is the contribution limits, which are much higher for 401k investments. If you have a 401k, you’ll be able to contribute $18,500 per year (or $24,500 if you’re over 50). That’s more than 18 grand you can park tax-free into these accounts. Not too shabby! But you can’t just walk into a Charles Schwab office and open one. A 401k must be set up by your employer, who often then agrees to match part of your contribution. Always take the match! Free money isn’t something you’re going to find very often.

The IRA isn’t as generous though. Federal law only allows $5,500 per year in this account, or $6,500 if you’re over 50. IRA stands for Individual Retirement Account, which means you’ll be responsible for opening it and funding it yourself.

A Roth IRA has different tax advantages – you pay upfront. While a 401k or traditional IRA tax your money when you withdraw it at retirement, a Roth IRA (or Roth 401k) taxes you when you contribute to the account. You can then buy financial products and watch them grow free from any kind of taxes.

Which Retirement Account is Right for Me?

Picking a retirement vehicle is a huge decision, but you aren’t limited to just one. You’re welcome to open both a traditional Roth IRA AND  401k  investments and crank up the contributions. The total limit for all sources (including any match by your employer) is $55,000.

Having trouble figuring out your retirement plan? Red Rock Secured has answers to your questions. If you need advice about getting started or want to add a gold IRA to your investment portfolio, leave us a message.

 

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