401(K) vs IRA
Today’s marketplace offers lots of choices in terms of retirement planning vehicles. The 401(k) (or 403(b) for the nonprofit sector) and Individual Retirement Account (IRA) are two of the most common. While they share some similarities, the differences are more important for the impact they could have on the growth of your retirement funds. However, though the differences are clear, the question of which type of account is better does not have a clear answer. As you will see below, some features of the accounts may be perceived by some as advantages and as disadvantages by others. Investment preferences and retirement are personal matters, so you should weigh the options carefully before you choose an account that makes the most sense for you. In fact, if you can afford to contribute to both types of accounts, you should do so to round out your investment portfolio.
There is also a down side to these tax benefits. If you withdraw money from your IRA or 401(k) before you reach age 59 (and one half!), you will not only have to pay tax on the amount you withdraw, but will most likely be stuck with an early withdrawal penalty as well. The safest route is to not touch these accounts until you retire. If you must tap these funds, do so only with the advice of a tax professional so you are not surprised by unpleasant notices from the IRS come April 15.
The biggest difference is simply that a 401(k) is offered as part of an employee benefits package, while an IRA is owned and administered by the individual account holder. This difference accounts for one of the major advantages of a 401(k) over an IRA: your employer usually matches your contribution to your plan up to a given percentage. For instance, if your contribute 2% of your pay to your 401(k) each pay period, your employer might match your contributions, essentially doubling your money. For many people, this benefit alone is reason enough to choose a 401(k) over an IRA if they must choose one or the other.
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