Whether you’ve just started a new job out of school or have been a part of working America for years, retirement has probably come across your mind at least once. It’s never too late to start saving, and the sooner you start planning, the happier your retirement will be. There are two main ways that you can save for retirement: Individual Retirement Account (or IRA) and 401(k). Here are some of their differences:
First, IRAs and 401(k) plans come in two forms: Traditional and Roth. Traditional allows you to make pre-tax contributions to the account allowing your money to grow. Taxes are not taken out until you withdraw the money out of your account. A Roth is a post-tax contribution you make that will also allow your money to grow and can be withdrawn tax-free.
Where It’s Offered
IRA accounts are held by credit unions, brokerages and banks, like us, allowing you to own many different assets within your IRAs, including stocks and Certificate of Deposits (CDs). 401(k) plans can be limiting in where your money can be invested and typically offer several fund options to match the different risk tolerances of employees.
Who Is Eligible
A 401(k) does not have an age limit and anyone that works for an employer that offers the plan is eligible. There’s no age limit for opening a Roth IRA, but Traditional IRAs are for those 70 ½ years of age and under with both requiring earned income to be eligible. You can open an IRA on your own, and for a 401(k) plan, the employer must enroll you.
Contribution Limits
How much you can contribute is more limited with an IRA versus a 401(k). For 2018, if you’re under 50, the most you can contribute to any IRAs is $5,500, and if you’re over 50 you can contribute up to $6,500 in the year. Even if you have more than one IRA, the combined total can’t exceed $5,500 (or $6,500 if you’re over 50). With a 401(k) plan, you can contribute much more. Those under 50 can contribute up to $18,500 each year, and those over 60, $24,500.
Also, when money is invested into a 401(k), a portion of it is sometimes matched by the employer meaning for every dollar invested, the employee could receive a percentage of that from the employer. IRAs do not offer this option.
Access to Funds
While it is not ideal to withdraw from your retirement fund, we understand that things can come up that may force you to do so. Early withdrawals (taken before the age of 59 ½) from a 401(k) are taxed as ordinary income plus a 10% penalty fee, so you will lose a good chunk of your money that you’ve invested. You can only avoid the penalties with exceptions like death, disability or divorce. Traditional IRA withdrawal is similar in that you are subject to taxes and that steep 10% penalty with additional exceptions. However, Roth IRA is vastly different in that you can withdraw your original contributions tax and penalty free before the age of 59 ½. If you want to withdraw your original plus the money that has grown, you have to be at least 59 ½ and have held the account for at least 5 years. Whereas, you will still have the 10% penalty for early withdrawal.
The great thing about 401(k) plans and IRAs is that you don’t have to choose one over the other – you can do both to maximize on retirement savings. At Camino Federal Credit Union, we offer IRAs from significant tax benefits to greater returns to help you get you on track for retirement. Come to our Montebello or Cerritos branch today to speak with one of our Advisors today about how you can start saving for retirement.