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IRA or 401(k)? Which One Is Right for You?

One of the challenges you will likely face when you're starting to plan for retirement is determining what type of account best meets your needs. While both of these accounts offer some tax benefits, there are specific differences which you must be aware of before you determine which one is right for your needs.

Understanding the Differences

Blog IRA or 401k

There are some significant differences between a 401(k) plan and an IRA (Individual Retirement Account) which can help you determine which plan is right for you. Here are some of the key differences:

  • Account Availability – anyone who is over the legal age of majority may open an IRA to help them save for retirement. 401(k)’s are employer-sponsored plans and are generally offered to employees as part of their overall benefits package. Remember, you may deposit funds to both types of accounts.
  • Maximum Deposits – there are separate limits on the amounts the Internal Revenue Service (IRS) allows you to deposit on an annual basis. For 2016, those under 50 are allowed IRA deposits of $5,500 and for those over 50, $6,500. Those who have employer-sponsored 401(k) accounts and are under 50 may deposit $18,000 and those over 50 may deposit $24,000.
  • Investment Management – typically if you have an IRA account, you can pick your investments on your own within the confines of where you set the account up. However, with a 401(k) plan, the plan manager generally selects the investment pools. In most cases, 401(k) accounts will offer investors a range of mutual funds.
  • Depositing Funds – when you have a 401(k) plan, your employer may offer you an option to make automatic deposits in pre-tax dollars. Deposits to an IRA plan are made in after-tax dollars.

Understanding the Similarities

There are some ways where 401(k) plans and IRAs are similar though there are not as many similarities as there are differences.

  • Tax Treatment – both plans offer investors tax benefits; a 401(k) reduces your taxable income and your IRA is fully tax deductible.
  • Age of Depositor – those who are under the age of 70 ½ are eligible to have either type of plan.
  • Minimum Age to Withdraw – investors are typically allowed to begin withdrawing funds from both plans at age 59 ½. It is also important to note that everyone must take required distributions beginning at age 70 ½.

Saving for retirement is important. Decisions about retirement plans should be discussed with your tax planner to determine which type of account best meets your investment goals and your savings goals. If you are considering opening an IRA, contact a Member Financial Representative at 918-664-6000, option 8. We will be happy to review the plans we offer with you and help you make the best decision for your specific needs.

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