Nearly 25 percent of adults do not have any sort of a retirement account. Many cite the reason as being that starting a retirement is too confusing and that they do not know where to start.
Planning for retirement does not have to be difficult or confusing. However, with the different types of retirement funds, such as IRAs and 401ks, it makes sense that some people will be confused.
What exactly is the difference between an IRA and a 401k? What is the best option for you? We will help to answer your retirement questions.
Here is your quick guide on the differences between an IRA and 401k and which one is best when planning for retirement.
What is an IRA?
An IRA stands for an Individual Retirement Account. You can open one up on your own at any time. A self directed IRA is an IRA account where you can invest in things outside of stocks and mutual funds and invest in real estate for example.
A major benefit of traditional IRAs is that the contributions are tax-deductible. This means that if you contribute the full annual amount of $6,000, then you will be taxed as having made $6,000 less of your annual salary.
What is a 401k?
A 401k is a retirement plan usually offered by a company to its employees. A major benefit of a 401k is that the company can offer to match whatever an employee contributes up to a certain percentage.
The match is usually a small percentage. But even if it’s anywhere from 3 to 6 percent of your annual salary, it is free money being added to your 401K.
Many people will often contribute just the max of what they need to get the company match and then contribute to their IRA.
What is the difference between an IRA and a 401k?
The primary difference between an IRA and a 401k is that one is opened up by an individual and the other is only accessed through an employer offering it.
An IRA has a wider variety of different investment vehicles to choose from while a 401k usually has a more limited selection.
The contribution limits vary significantly between an IRA and a 401k. You can contribute up to $19,000 for those 50 and under for 2021. If you are older than 50 years old, you can contribute up to $26,000 annually.
The annual contribution limits on an IRA are much less than a 401k. You can contribute up to $6,000 annually to an IRA and up to $7,000 if you are 50 and older.
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Opening up either a self-directed IRA or 401k could be in your best interest. It could help build a sizeable nest egg and help you have financial peace for when you retire.
If you are interested in learning more about the difference between an IRA and a 401k and other tools for planning for retirement, follow us along for the ultimate financial insight.