The golden years of retirement are all the more golden if you are financially able to live comfortably. Two popular ways to save for retirement are 401(k) plans and IRAs, which both have tax advantages. Both are good options, and the most important thing is that you have a retirement savings strategy in place. Let’s look at a few of the benefits of each type of retirement plan to help you decide if one of these options is right for you.
Advantages of the 401(k)
- Maximum contribution amounts with a 401(k) are significantly higher than with the IRA, especially when you add in employer contributions.
- You can have the money automatically deducted from your paycheck into your 401(k) account each pay period. If you never see the money, you’ll be less likely to miss it.
- A certain percentage of your income contributed to a 401(k) plan is on a pretax basis (this amount is exempt from federal income tax and therefore lowers your taxable income) basis.
- Any matching contribution from your employer basically amounts to free money. Some employers offer as much as a 50 percent match of the first 6 percent of your 401(k) contribution.
Advantages of an IRA
- Investment options are more flexible, meaning you have more control of where your money is invested.
- The IRA is a great way to save for retirement if you do not have access to a 401(k) or other employer sponsored plan.
- Qualified withdrawals are tax-free.
- With the Roth IRA, you are not required to take minimum distributions at age 70 ½, as you are with some employer sponsored plans.
Both the 401(k) and the IRA offer tax-advantaged savings plans. The good thing is —you really don’t have to choose just one strategy. You can actually contribute to both an IRA and a 401(k) plan. A professional retirement investment advisor can go over more of the specifics and give you details of other retirement savings plan options.