How a 401(k) Differs from an IRA

Is there an advantage to a 401 (k) that you cannot find with an IRA? You can answer this question for yourself and save for your retirement accordingly by learning how a 401(k) differs from an IRA.


An Overview of a 401(k) Retirement Account

A 401(k) is an employer-sponsored retirement account. People who work for companies that offer 401(k) accounts are generally eligible to participate in the retirement savings program once they meet the necessary qualifications, which may include completing a training period of 60 to 90 days or working at least 34 hours per week.

Moreover, your employer may automatically enroll you in the company-sponsored 401(k) once you meet the qualifications without you having to ask to participate in it first. Your contributions to your account may also be deducted for you from your paycheck, saving you the effort of having to fund your account yourself.

The amount you can contribute each year can be subject to change. However, for the 2016-2017 tax year, you can contribute up to $24,000 to a 401(k) as long as you are age 50 or younger. If you are over age 50, you can contribute up to $18,000.

A 401(k) does not allow you the freedom to choose from a wide variety of stocks, bonds, and other assets to invest. You must choose from a pre-selected list chosen by your employer. 

An Overview of an IRA

An IRA, or individual retirement account, comes in two primary forms: a traditional IRA and a Roth IRA. No age limit exists for opening an IRA; anyone can open and fund this type of retirement account. To open and fund a traditional IRA, you must be under 70 ½ years of age and have an earned source of income. 

As with 401(k) accounts, the amount you can contribute each year may vary. You can check with a financial adviser like James Dondero to verify the amount that you can pay into your IRA. 

The 2016-2017 tax year allowed people 50 and under to pay in up to $5500 to an IRA. People over the age of 50 could pay up to $6500. When you open an IRA, you can choose from a variety of stocks, bonds, mutual funds, ETFs, and other investments. You can open an IRA by consulting with a financial analyst like James Dondero or at financial institutions like:

  • A bank 
  • Brokerage firm
  • Insurance company
  • Investment firm

It is important that you allow a certified management accountant like James Dondero to guide you in funding your IRA if you are unsure of what to invest in or how much to contribute to the account. 

Top Personal Finance Tips

Money is a difficult subject and keeping track of your finances can be hard. Especially when lavish lifestyles seem so effortless online, it can be easy to fall into the trap of overspending. You might need to utilise other forms of finance when you’re faced with an emergency too. Some people have used a short term loan when they didn’t have funds readily available for a crisis, but you might want to get your finances secure for the future so you don’t need to outsource each time. Here are some top tips to help you get your personal finances in a better place. 

Personal Finance Tips

Create A Realistic Budget

The first step to getting your finances in order is to create a budget. Don’t go crazy and limit yourself to barely any money each week, otherwise, you’ll end up splurging eventually and spending more than you would have normally. Make sure your budget is realistic and considers your outgoings and lifestyle. There are lots of ways to make little cuts here and there, but don’t go overboard and make it difficult to stick to. 

Make Small Savings Little And Often

Saving doesn’t have to be putting hundreds away each month that you only end up dipping back into anyway. Instead, try putting smaller amounts away more often. For example, if you buy coffee 5 times a week on your way to work, why not cut it down to 2 times a week. Once on a Monday to get you ready for the week, and once on a Friday as a little treat. Then pop the money that you would have spent on the other 3 days into your savings. It might not seem like much at the time, but after a couple of weeks, it really adds up. 

Use A Calendar

You’ve probably got a fair few outgoings each month, and special occasions like birthdays and trips away, so why not add them all onto the same calendar. Having your month marked out clearly will allow you to see what you need to spend in advance, and you’ll easily know if you need to save a little more for something that’s coming up in the next few months. 

Restrict Impulsive Buying

We’re all guilty of splurging on an expensive treat for ourselves after having a bad day, and that’s fine once in a while. It’s when impulsive buying becomes a habit that it’s a problem for your finances. Do your best to resist the urge to buy a new pair of shoes when you only recently bought a pair. When buying, there’s a difference between needing and wanting, and most of the time we merely want the products so try not to spend unnecessarily. 

Reduce Your Outgoings

Take a look at all of your outgoings and see if any of them can be reduced. For instance, are you paying out a lot for streaming services? If so, try and cancel your subscriptions for the ones you don’t actually use. You could also look at paying off more of your debts. This way, in the long run, you’ll have more money each month as you won’t still be paying them off. 

Have An Emergency Fund

Being hit with an emergency that you can’t afford can be scary. To eliminate the horror of receiving an unexpected bill through the door, try and build up some emergency funding. Keep it separate from your savings account and it’s money that you don’t touch unless you’re in a genuine crisis. 

Don’t Spend Just Because

If you receive a nice bonus at work or you get an increase in your yearly salary, don’t let it immediately affect your lifestyle. Just because you have more money coming in each month, doesn’t mean you have to spend more. If you do come into more money, try living on your previous budget and putting the extra into your savings account. After a few months, if you realise you could spare a little more towards your budget, then do so. But don’t spend more money for the sake of it. 

Keeping your finances in check doesn’t have to feel impossible. Making small changes to your spending and the way you save can make a massive difference. Even though you might cut down on your spending, it doesn’t mean you have to go without. You can still enjoy some of life’s little luxuries without breaking the bank. Try forming a healthy budget and putting some money away each month and you’ll soon notice your finances improving.