Guide to Comparing 401(k) and IRA

401(k)s vs IRAsWhen it comes to tax-advantaged retirement savings accounts, people have many options. The most popular retirement savings accounts are 401(k)s and IRAs. Both accounts are similar in many ways, but they also come with notable differences. It’s important to view them through the lens of retirement planning.

401(k)s, IRAs, and the Retirement Years

As you move closer to retirement, you move into the “protection” stage. After accumulating wealth over the years, it’s time to start preserving it for retirement.

If you currently have your money in a 401(k) with your employer, when you leave you may want to consider transferring it into an IRA. Depending on your needs in retirement, you might explore the possibility of a strategic amount of it being allocated in an annuity.

Here are some reasons why:

  • As you approach retirement, financial goals tend to turn more income-related
  • People tend to need more “protected income” for retirement than they did in their working years
  • By moving some 401(k) funds into an IRA, with some money in an annuity, you will have future options for guaranteed income
  • You may be able to guard some of your retirement assets from market risk
  • With the right annuity, you can set up a guaranteed income stream for monthly living expenses
  • Sometimes IRAs have lower fees and expenses than 401(k)s may have
  • If a 401(k) has high fees, keeping money in the plan means those fees will keep eating away into the balance

Of course, people’s current situation, future needs, and future goals will vary. This approach is worth considering in lieu of your retirement needs, but ultimately any strategy should be appropriate for your complete financial picture.

Be sure to confer with an experienced financial professional about your personal situation. Here are some other fundamentals which may help you with any retirement decisions.

401(k) Basics

401(k)s vs IRAsThe 401(k) is a tax-advantaged, employer-sponsored retirement plan. Like the IRA, it comes in traditional and Roth options. Most investors go the traditional account route. Making contributions to a 401(k) will reduce your tax burden on the front end. Moreover, your funds grow on a tax-deferred basis.

401(k) plans aren’t just for those in a “traditional” employment capacity. Most plan-holders are, but you can also get specialized 401(k) plans if you are a small business owner. Keep in mind that these plan options tend to be complex. If you are interested in them, consult with an accountant or a financial advisor for professional guidance.

IRA Basics

Unlike the 401(k), most IRA options aren’t sponsored by employers. There are some IRA options which are, though. IRA stands for “Individual Retirement Arrangement.” Nonetheless, it’s also known in the financial community as an “Individual Retirement Account.” Many workers without a 401(k) option go with this retirement savings account.

Like the 401(k), the IRA is a tax-advantaged retirement savings account. There are many options for IRAs, including traditional and Roth. However, Roth IRAs may come with limitations depending on certain conditions. Deductible IRAs allow your funds to grow tax-deferred. If you are self-employed or a business owner, there are more specialized IRA options – consult with a financial advisor or an accountant.

401(k) vs. IRA Benefits

There are different advantages to both retirement savings accounts. When comparing different options, it helps to think of each account as a “tax wrapper.” In other words, a retirement account is simply a classification of how you allocate your assets for tax purposes. Comparing a traditional 401(k) and a traditional IRA, here is a breakdown:

401(k) benefits include:

401(k)s vs IRAs

  • High contribution limit of $22,500 (2023 tax year)
  • For people aged 50 and over, the catch-up limit is another $7,500 (2023 tax year)
  • Permits employer matching of up to 6%
  • Contributions are income tax deductible
  • Tax-deferred fund growth
  • Emergency withdrawals available (withdrawers must meet certain conditions)

IRA benefits include:

  • High contribution limit of $6,500 (2023 tax year for many IRAs)
  • Catch-up contribution up to $7,500 for those aged 50 and over (2023 tax year)
  • Often low setup cost and easy to create
  • Contributions are tax deductible (depending on your income bracket)
  • Can open yourself or through a bank, online broker, or other vendor
  • Can invest in stocks, bonds, mutual funds, annuities, and other assets
  • Might offer more flexibility in asset allocation and adjustments
  • Permits some emergency withdrawals without penalty (if withdrawn amount replaced within 60 days)

401(k) vs. IRA Cons

Of course no retirement savings account comes without some disadvantages. Here are some downsides for 401(k)s and IRAs:

401(k) disadvantages include:

401(k)s vs IRAs

  • Often limited investment options compared to IRAs
  • Can have costly service, maintenance, management fees
  • Providers give reports meeting just legally required standards
  • Not likely as much flexibility for asset allocation as IRAs
  • Needs more self-monitoring to determine performance
  • Even if early withdrawal permitted, may have to pay 10% penalty
  • Most plans don’t give options for letting you draw guaranteed income
  • Early withdrawal penalty if money taken out before age 59.5
  • Contributions can limit or eliminate potential IRA contributions
  • Potential waiting periods of 6 months to 1 year
  • Required minimum distributions apply to it

IRA disadvantages include:

  • Many IRAs have lower contribution limits than 401(k)s
  • Early withdrawal penalty before age 59.5
  • Harder to play “catch up” in retirement savings (for many IRAs)
  • Deductible contributions can be reduced or eliminated by 401(k) contributions
  • May have no deductible Roth IRA contributions (depends on household income)
  • Required minimum distributions apply to it

If you’re planning out your retirement, conferring with a financial professional can help you achieve your income and financial goals. can assist you.

Use our Find a Financial Professional section to connect directly with an independent financial professional. You can request a personal strategy session to discuss your needs and goals. Should you have any questions or concerns, call us at 877.476.9723.

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