Understanding Key Differences Between an IRA and a 401(k)
While researching the best ways to save for retirement, you will surely come across two major options: an IRA and a 401(k). An IRA and a 401(k) are two different types of retirement accounts. Both offer tax advantages and other considerations while saving throughout life for retirement. The main difference between the two is that one can be set up, funded, and invested on your own, such as a precious metals IRA. The other is something you open through an employer. Keep reading to learn more about IRAs, 401(k)s, and the differences between an IRA and 401(k) so that you can be knowledgeable on your journey to saving for retirement.
What is an IRA?
According to Fidelity, an IRA is an account set up at a financial institution that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis. Whether you choose a traditional or Roth IRA, the tax benefits allow your savings to potentially grow, or compound, more quickly than in a taxable account.
The 3 main types of IRAs each have different advantages:
- Traditional IRA – You make contributions with money you may be able to deduct on your tax return, and any earnings can potentially grow tax-deferred until you withdraw them in retirement.1 Many retirees find themselves in a lower tax bracket than they were in pre-retirement, so the tax-deferral means the money may be taxed at a lower rate.
- Roth IRA – You make contributions with money you’ve already paid taxes on (after-tax), and your money may potentially grow tax-free, with tax-free withdrawals in retirement, provided that certain conditions are met.2
- Rollover IRA – You contribute money “rolled over” from a qualified retirement plan into this traditional IRA. Rollovers involve moving eligible assets from an employer-sponsored plan, such as a 401(k) or 403(b), into an IRA.
What is a 401(k)?
A 401(k) plan is a retirement savings plan offered by many American employers that has tax advantages for the saver, according to Investopedia. It is named after a section of the U.S. Internal Revenue Code.
The employee who signs up for a 401(k) agrees to have a percentage of each paycheck paid directly into an investment account. The employer may match part or all of that contribution. The employee gets to choose among a number of investment options, usually mutual funds.
Key takeaways regarding a 401(k) include:
- A 401(k) plan is a company-sponsored retirement account that employees can contribute income, while employers may match contributions.
- There are two basic types of 401(k)s—traditional and Roth—which differ primarily in how they’re taxed.
- With a traditional 401(k), employee contributions are “pre-tax,” meaning they reduce taxable income, but withdrawals are taxed.1
- Employee contributions to Roth 401(k)s are made with after-tax income; there’s no tax deduction in the contribution year, but withdrawals are tax-free.1
- For 2020, under the CARES Act, the withdrawal rules were relaxed for those affected by the COVID-19 pandemic, and RMDs were suspended.
What are the Differences Between an IRA and 401(k)?
According to the Balance, an IRA is an account you open for yourself as an individual. However, a few types of IRAs, such as a simplified employee pension (SEP) or a Simplified Incentive Match for Employees (SIMPLE) IRA, allow an employer to open and fund an account on your behalf. A 401(k) is a type of retirement savings plan employers can set up on their workers’ behalf. As with an IRA, you get tax advantages for saving in a 401(k).
Some companies also contribute to employees’ accounts. A 401(k) operates under the rules of the Employee Retirement Income Security Act (ERISA), a federal law that sets minimum standards for private-sector workplace retirement plans.
The tax advantages you get with an IRA versus a 401(k) depend on the type of account. The withdrawal rules also vary, however, if you take money out of either account before age 59 ½; you could owe taxes and a 10% penalty.
About Priority Gold
One of the ways you can save for retirement is through a precious metals IRA. As mentioned, you can get this set up yourself, and does not need to happen through an employer. Opening a precious metals IRA is easy—our process is quick, simple, and only involved 4 easy steps. If you are ready to invest in gold to protect your savings and secure your future, we can help.
Priority Gold is one of the most trusted precious metals dealers in the United States with BBB A+ Rating, AAA Rating with Business Consumer Alliance, and 5 Stars Rating with TrustLink. We specialize in providing precious metals investment services with Security, Liability, and Great Convenience for customers. Our team is committed to helping to streamline their precious metals purchases at a fair price, selecting the right precious metals portfolios, and meeting their important financial objectives.
We offer Free Storage for qualifying Gold & Silver IRA accounts, a fast & easy gold buying process, and smooth IRA Transfer. And gold shows up on schedule. Priority Gold guarantees the highest standards of customer service, which comes with honesty, professional conduct, and the Ethical Code of Business.
For more information, visit us at prioritygold.com