401K vs. IRA

When considering investing for your retirement youâ ll hear a lot about 401K's and IRA's (or Individual Retirement Accounts) and sorting out what you should be doing is difficult. The core difference is that 401K's are offered through your employer, and with matching schemes in place at many companies. These are often where you want to contribute your money first, as the matching effectively gives you free money. IRA's are the personal option for retirement savings that you can set up through your bank, brokerage firm, or mutual fund company.

Both plans give you a tax reduction for amounts you pay now and both are taxed when you withdraw funds in retirement. Assuming you will not be earning too much income in retirement, this means you not only defer paying taxes but can end up paying at a lower rate. There are many specific rules related to time limits and contribution limits, for a good guide I'd suggest you check here. One key difference between 401K's and IRA's is that you can borrow from your 401K for things like medical emergencies. You do have to pay the funds back, but at least you have this flexibility. Borrowing from your IRA is far more complicated and even if you do, you only have 60 days to repay. So with employer matching and the flexibility advantages, you're probably going to want to top off your 401K before you start making contributions to your IRA. After that you can consider contributing to an IRA account if you have additional funds to put away for retirement.

By Jeffrey Glen

Copyrighted 2020. Content published with author's permission.

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