Believe it or not, more than 64 percent of American workers don’t have enough money saved up to retire when they reach 65. This isn’t because saving for retirement is too hard. It’s because people aren’t sure where to start.
Typically, there are two main types of retirement accounts you can use to grow your retirement savings. These are the IRA and the 401k.
Before you can make the right choice for your future, you need to understand the nuances of each account. This is what you need to know about the difference between IRA and 401k accounts.
What Is an IRA?
An IRA is a type of retirement plan that individuals can enroll in on their own. Taxes on your contributions are tax-deferred, so you won’t have to worry about paying taxes upfront each time you add to the account.
You’re free to choose the managing party or custodian for the retirement account which gives you more flexibility to control the types of investments your money goes into. In most cases, people choose to open IRAs with their bank or credit union.
This makes it easy to keep track of your funds.
What Is a 401k?
A 401k the most common type of retirement plan offered by employers as part of a standard benefits package. You’re allowed to contribute to the plan by withholding part of your paycheck every pay period.
Many employers also offer contribution matches. This means they’ll pay into your retirement account for you as long as you make contributions throughout the year.
You make contributions on a pre-tax basis which can help lower the amount of money you owe come tax time. The funds inside the 401k get invested by the 401k issuer which helps grow your savings and speed up your wealth accumulation.
That said, the investment pools are fairly limited and may not give you the high returns you’re looking for. You can check out this blog post for more of the pros and cons associated with this type of retirement account.
The Difference Between IRA and 401k Plans
So, is an IRA account the same as a 401k? No. The two retirement accounts are completely different. The main difference between IRA and 401k accounts revolves around who opens the account in the first place.
401ks are only available through your employer. If you move to a new job, you’ll have to roll it over or start a new retirement account entirely.
IRAs are accounts that you can open on your own. They only terminate if you tell the bank to close the account.
Which Is Best for You?
Ultimately, deciding which type of account is right for your needs is a matter of personal preference. Now that you understand the difference between IRA and 401k accounts, you’re ready to make a smart choice for your future.
Keep in mind that you’re free to open both types of accounts if you want to create an aggressive retirement savings strategy.
Building your savings is the best way to plan for your future. Check out our latest posts for more tips and advice.