It’s never too early to start preparing for your future, and the sooner you start saving money the better your retirement nest egg will be. It’s more important than ever for people under 40 to take saving for retirement into their own hands, especially with the future of Social Security benefits coming into question.
According to the U.S. Social Security Administration, it only has enough reserve funds to pay social security in full until 2037, after which point the Social Security Administration will only be able to pay 76 percent of benefits to each qualifying American. Though you may be able to claim some amount of social security at retirement, it’s good to have other savings waiting for your golden years. IRAs and 401(k)s offer a means to prepare for retirement, but how do you know which to choose?
What’s the Difference between an IRA and a 401(k)?
The world of IRAs and 401(k)s can seem too confusing and intimidating that many people don’t even bother with them. IRAs and 401(k)s are not so scary when you look at them in their simplest terms. IRA stands for Individual Retirement Account. IRAs are obtained by the individual, generally through his or her bank. There are different types of IRA accounts, each with their own, benefits but in short, traditional IRAs are tax deductible and Roth IRAs are not.
A 401(k) plan differs from IRAs in that they are established by your employer. The 401(k) contributions are made through payroll deductions which some employers setup automatically. For both IRA and 401(k) plans, the account owner must reach retirement age, 59 ½, to begin withdrawing funds. In some cases, IRAs can be withdrawn from prior to retirement, however, the account owner will have to pay a penalty fee.
Choosing between an IRA and a 401(k)
When choosing between an IRA and a 401(k), it is important to understand your entire financial picture, including what retirement plans your employer offers. It’s also important to keep in mind that you don’t have to pick one over the other. If you’re enrolled in a 401(k) plan through your employer, you can still open an IRA account.
Traditional IRAs are tax deductible, which can help reduce how much you owe the IRS at tax time. The 401(k) plans also offer a tax benefit as they can help reduce your taxable income. IRAs can only be opened by people under 70 ½, whereas the stipulations of 401(k) plans are generally determined by the employer, so people over 70 ½ could be eligible if the employer chooses.
How Do You Start?
A 401(k) plan is only available to those whose employer has plans in place. Speak to your employer to find out about your specific 401(k) options. IRA accounts can be obtained through most banks. Speak with your bank to find out if they offer IRAs and to learn which type of IRA is best for you.
Do your future self a favor and start saving now. Whether you choose an IRA, a 401(k), or both, additional savings plans can help make your retirement comfortable.
– By Samantha B. Rivers, Editor