Finance

A guide on IRA vs 401k

Both IRA and 401k are very commonly available retirement saving plans. However, jumping at the first opportunity of retirement saving without carefully examining all the available options available could lead to extreme inconvenience. Although minute and subtle, there are quite a few differences between these two plans available which can help in planning your life choices in a better way.

The first point of difference between these two plans occurs where 401k plan happens to be an employer sponsored plan. So, it would mean that only a person working for a particular firm which offers this plan can divert his funds into this plan and cannot avail its opportunities otherwise. While IRA can be taken up even if one is not working in a firm or if the firm doesn’t offer the 401k plan. Another difference that arises here is that a part of the funds of the 401k plan can be funded by the employer too. The employer usually matches to the funds of the employee till a particular percentage of his paycheck, while this is not seen in the IRA plan.

Both 401k and the traditional IRA plans have the taxes on the paycheck calculated after a particular sum is transferred into the plans. The tax is applied to these funds only at the time of withdrawal. However, a different type of IRA is available, the Roth IRA plan which does exactly the opposite of this and removes the taxation on these funds at the time of withdrawal as the transfer of these funds into the plan would have taken place after the taxation of total income.

As of 2017, the limit of contribution for the 401k plan is $18,000 which can be increased by $6,000 for people above the age of 60. While for Roth IRA, it was $5,500 and could be increased by $1,000 for individuals above the age of 50 and this limit was significantly less. Another confinement faced by Roth IRA is that individuals with their annual income of $133,000 or couples with annual income of $196,000 are ineligible to invest in this plan.

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