No matter what stage of life you are in, it is never too early or too late to start saving for retirement.
In order to retire when you want, you should be using retirement vehicles to save and grow your money. While there are many retirement plans to choose from, many people choose to participate in either a 401(k) Plan and/or an Individual Retirement Account.
Understanding these retirement plans can be difficult, but it is important to properly plan for your future. Let’s take a look at the key information you need to help you with your retirement planning:
What is a 401(k)?
The most commonly used retirement plan, a 401(k), is an employer-sponsored plan that involves contributing a portion of your pay towards retirement. You choose the percentage of your income you want to contribute each pay period, and that money is put into an account to be withdrawn penalty-free at age 59 ½. The majority of companies that offer a 401(k) plan will also offer a company match.
If you work for a church, public school, university or non-profit organization, you may have the option to contribute to a 403(b) plan. A 403(b) plan functions in the same way, and offers the same tax advantages as a 401(k) plan.
What is an IRA?
An Individual Retirement Account or IRA, is an account that allows you to invest your retirement contributions and can offer different tax advantages. Unlike contributing to a 401(k), you can choose the exact dollar amount you want to put into your IRA–although there are limits of how much you can contribute depending on your age.
While there are several types of IRAs, the most common are Roth IRAs and Traditional IRAs. The difference between the two types is the time period in which you pay taxes on them. If you contribute to a Roth account, you pay the taxes right away on your contribution and it grows tax free. In contrast, a Traditional IRA does not require you to pay taxes as you contribute to it, but instead when you withdraw from the account.
Benefits of a 401(k)
No matter your age, you ultimately should be contributing to a 401(k) plan. The most important benefit 401(k) plans offer is employer matching. Your employer will match your contributions to a certain percentage, which means you are essentially receiving free money toward your retirement. In comparison to an IRA, 401(k) plans have a much higher contribution limit—in 2023, you can contribute up to $22,500 if you are under the age of 50. If you’re over 50 you can contribute an additional $7,500.
Benefits of an IRA
IRAs are a great retirement option for anyone, but are particularly beneficial to those who are self-employed, those who want to leave funds to beneficiaries, and for young people. Prior to entering the workforce and having access to a 401(k), young people can use an IRA to start planning for retirement early.
An aspect of IRAs to note is the contribution limits and withdrawal fees. There are limits to how much money you can put into your IRA, and these contribution caps change year-to-year. For example, in 2024 you can only contribute $7,000 to your IRA if you are under the age of 50 by the end of the year. However, if you are over the age of 50 you have the advantage–known as a catch-up contribution—to contribute $8,000 to an IRA. There are also income limits to contributing to an IRA and it’s always important to check with your tax professional to make sure you can.
Choosing What’s Best for You
When comparing both types of retirement plans, the benefits they offer to you are similar. Both accounts are tax advantageous and both will help you grow your retirement savings. If you are maxing out your 401(k) contributions and have the financial means, consider using an IRA. If you are only contributing to an IRA, talk to your employer about what 401(k) options they offer.
At Emerj360, we encourage clients to contribute 10-15% of their earnings toward their retirement assets, whether you have an IRA or 401(k). No matter what retirement plan you choose, you don’t have to make that decision alone. We work closely with you to plan your retirement and how to best use your retirement plan. You can schedule an appointment online with one of our financial professionals today to get your questions answered and to get started on your retirement journey.
