Understanding Retirement Accounts: 401(k)s vs. IRAs

It’s never too early to start saving for retirement! And the good news is that there are several different options for retirement accounts. But with so many options, understanding the differences between them can be a little confusing. That’s why today, we’re breaking down the two most common retirement accounts, 401(k)s and IRAs, and explaining the unique benefits of each.

The Basics

Both 401(k)s and IRAs are accounts that allow you to contribute and invest funds with the hope that they will compound and grow over time. They both include valuable tax benefits. The main difference between them is that 401(k)s are employer-sponsored, and IRAs are opened by individuals through a financial institution or brokerage firm. That is why the latter is called an “Individual Retirement Account.”

A 401(k) allows higher annual contributions, but an IRA offers more investment options.

401(k)s: The Details

• Employer-Sponsored: A 401(k) plan is offered through your employer and may differ from company to company. Your employer will usually automatically sign you up for their 401(k) plan, although you can opt out if you wish. It’s up to you to choose a fixed amount or percentage of your paycheck that will go into the account every time you’re paid.
• Employer-Matching: Many employers will match your contributions to your 401(k) up to a certain amount, which can greatly boost your retirement savings.
• Tax Advantages: Contributions to a 401(k) are made pretax, reducing your taxable income for that year. The earnings on your investments also grow tax-deferred. But withdrawals are taxed as ordinary income. Roth 401(k)s work in the opposite way, however. With a Roth 401(k), contributions are made after tax whereas withdrawals are tax-free, provided you are at least 59 ½ years old and have held the account for at least five years.
• Investment Options: Your employer usually offers a limited selection of investment vehicles, often including mutual funds.
• Contribution Limit (2024): For the 2024 tax year, you can contribute up to $23,000 (or $30,500 for those aged 50 or older) to your 401(k) plan.

IRAs: The Details

• Individually controlled: Anyone can open an IRA through a financial institution or broker, and the account remains under your control.
• Tax Advantages: IRAs have similar tax advantages to 401(k)s. For a standard IRA, contributions are made pretax, earnings grow tax-deferred, and withdrawals are taxed as ordinary income. Roth IRAs have non-deductible contributions and tax-free withdrawals.
• Investment Options: You are free to choose the vehicles in which to invest your funds, including stocks, mutual funds, and other assets.
• Contribution Limit (2024): The IRA contribution limit for 2024 is $7,000 (or $8,000 for those aged 50 or older).

Trust the Experts at SharePoint CU

Still have questions about 401(k)s and IRAs? We can help. Our financial experts are happy to discuss which retirement accounts are right for you. We can even help you open a traditional or Roth IRA to diversify your personal savings and reach your retirement goals. Contact us today to learn more.
 

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