Ah, the age old debate. Which retirement plan is going to be better for you? There are many options out there, of course. Two of the most popular are the IRA, or individual retirement account, and the 401K. Each has their benefits, but it is time to solve the question that a lot of people setting up their first retirement plan ask themselves and advisors. First, the basics of each account.
The 401k
The 401k retirement plan is one that is set up by your employer. When you start working, you sign up for the retirement plan and set up your options during this process. Every month, the employer deducts a predefined portion of your salary, before income tax is added, and then puts this portion into the account. Depending on your employer, they could even match your own contributions with theirs.
When you withdraw money from the 401k, income tax is deducted from it, based on the tax bracket you are in at the time. This is beneficial if you end up in a lower tax bracket after retirement, as less will be deducted for income tax.
Currently, there is no upper income limit on who can contribute to a 401(k), but an individual can contribute at most $18,000 to his or her 401(k) in 2015, and the maximum total amount that can be contributed between employer and employee is $52,000 in the same year.
IRA
An IRA, on the other hand, is a personal retirement account. You set it up on your own. It has a lot of retirement options available compared to the 401k. For example, you can choose between a traditional and Roth IRA. The traditional IRA involves the same contribution as a 401k, with deposits made before tax deduction. The Roth IRA option involves deposits made after tax has been deducted.
A huge benefit of the IRA is that you can choose exactly how much you want to deposit each month. In addition to this, you can choose the type of account you want based on your plans for the future. There is another great perk, which is that you can turn any IRA into a gold IRA account (precious metals account).
With a gold IRA, you basically buy physical gold for the money in your account. This keeps the currency safe against fluctuations in the economy. This is very advantageous because of the instability of the current economy.
Breaking down the differences
Contributions
401k – employer could match the deposits with their own (basically free money). Contribution amount is decided at the start of the plan.
Gold IRA – Only you deposit into the account. Others can too, but it isn’t guaranteed. Contribution amount is very flexible.
Point – 401K by a small margin
Options
401k – Not many options to choose from. Your future depends on the choices your employer makes. No customization available.
IRA – Many options to choose from. Two major types of IRAs exist. Very flexible plans, and can be customized as you desire, with gold or silver IRAs, etc.
Point – IRA
Taxes
401k – Tax deferred account. If you are in a higher bracket after retiring, you will be losing out.
IRA – Choice between tax deferred and Roth IRA means you can choose based on your assumption for post-retirement.
Point – IRA
Security
401k – Tied to the current economy and the state of the company. You could lose the money if the market collapses.
IRA – Gold IRA options provide relative security against possible market crashes.
Point – IRA
At 3 – 1, the IRA account is the clear winner of the comparison between the two. It is definitely the better investment option for retirement for a wide range of reasons. That being said, good luck with your plans for the future!
