Retirement is a time when many individuals begin to think about how to make their money last. For those who are employed, the two most common retirement savings vehicles are the Individual Retirement Account (IRA) and the 401(k). While both of these plans offer tax-advantaged savings, there are key differences between them that should be understood when deciding which one is best for your retirement savings goals.
The first key difference between an IRA and a 401(k) is the contribution limits. With an IRA, individuals can contribute up to $6,000 per year, or $7,000 if you are age 50 or older. On the other hand, 401(k)s allow for much higher contributions, with the maximum contribution limit being $19,500 per year, or $26,000 if you are age 50 or older.
The second key difference between an IRA and a 401(k) is the types of investments allowed. IRAs allow for a wide variety of investments, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). 401(k)s, on the other hand, are typically limited to investments offered by the employer, such as mutual funds and company stock.
The third key difference between an IRA and a 401(k) is the tax treatment of contributions and withdrawals. Contributions to an IRA are tax-deductible, while contributions to a 401(k) are not. Withdrawals from an IRA are taxed as ordinary income, while withdrawals from a 401(k) are taxed as capital gains.
The fourth key difference between an IRA and a 401(k) is the availability of loans. IRAs do not allow for loans, while 401(k)s do. This can be beneficial for those who need access to funds in the short-term, but it can also be risky, as any loans taken from a 401(k) must be repaid with interest.
Finally, the fifth key difference between an IRA and a 401(k) is the availability of employer matching contributions. Employers may match a portion of employee contributions to a 401(k), while this is not typically offered with an IRA.
When deciding which retirement savings vehicle is best for you, it is important to understand the key differences between an gold investing and a 401(k). While both offer tax-advantaged savings, the contribution limits, types of investments allowed, tax treatment of contributions and withdrawals, availability of loans, and availability of employer matching contributions are all important factors to consider.