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.

401(k)

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. 

Leave a Reply

Your email address will not be published. Required fields are marked *