Are IRAs the same as 401(k) plans?
Often mistaken for one another, IRA and 401(k) plans are similar – but not exactly the same. Besides being eligible for IRAs (Individual Retirement Accounts), working people can save some of their pay – and some tax dollars – through company-sponsored 401(k) plans.
Both types of tax-deferred savings accounts allow workers to put away a portion of their salaries for the future before paying taxes on it.
There are three subtle differences between IRAs and 401(k)s:
- The type of employers that qualify to offer those accounts.
- Investment options that employers/employees can choose from for each account.
- Limits to the amount of money employers/employees can invest annually in each.
401(k) vs. IRA
Some companies want to help their people save for retirement. Rather than providing their own pension plans, they turn to IRS tax code section 401(k) to do that. Sometimes, the organization contributes the whole amount allowed by the government each year. That option gives staff members company-paid retirement plans to take with them when they leave or retire – if they have met the employer’s vesting requirements.
Other organizations pitch in some retirement account money by offering 401(k) matches. That means that the employer will match, dollar for dollar, qualified savings their employees deposit. Often, a company chips in at least a small percent of each employee’s salary as a company perk and incentive to open such accounts. In some cases, it’s up to employees to fund their entire 401(k) accounts from their earnings.
No matter who contributes, 401(k) plans permit pre-tax dollars to be invested. Pre-tax dollars give account holders more money to set aside. Before taxes are deducted, the extra money can be deposited at the onset and over longer periods of time in both IRA or 401(k) plans. The result tends to be bigger nest eggs, or plumper pots of gold at the end of the rainbow. Just as in IRAs, money in 401(k)s and other tax-deferred accounts can grow faster and fatter than investments normally left in ordinary, taxable savings accounts.
An individual can open a Roth or Traditional IRA account through most financial firms. However, 401(k)s (and similar accounts like SEP or SIMPLE IRAs), are only available if offered by an employer. Investment choices, such as mutual funds, stocks, bonds, etc.) are often selected by the employer. As with IRAs, 401(k) income accrues and compounds tax-deferred over the years.
For additional details on the benefits of tax-deferred investing, contact Ron VanSurksum at Advanced Asset Management. Email: email@example.com or call him at (616) 531-5220 or (616) 450-8439.
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