Photo of Ray Ferrara CFP Ray Ferrara CFP Jun 11, 2020

Saving for your retirement requires a bit more thought than merely setting some money aside every paycheck and waiting until you retire. There are different retirement vehicles in which you can invest some of your funds to save up for your retirement; primarily the 401(k) and the Individual Retirement Account (IRA). 

Both of these plans have the goal of helping you save money using tax advantages so you can build up a retirement nest egg. However, some critical differences between them may allow you to benefit from one more than the other, depending on your circumstances and preferences. 

401(k) vs. IRA

The main difference between a 401(k) and an IRA is who establishes the plan. An employer must establish a 401(k). An IRA is not tied to an employer and can be established on your own initiative. 

When deciding on whether to invest in a 401(k) or IRA, the first question you need to ask is, does your employer match your contributions? If your employer does offer to match, your 401(k) will likely be the better option. If the answer is no, the decision is a little more complicated. 

You should also consider factors like:

  • Tax advantages — Payments into a 410(k) are made with pre-tax dollars, so they reduce your taxable income for the year the contributions are made. However, you do pay taxes when withdrawing.
    With a traditional IRA, the contributions are generally tax-deductible, but may be limited based on your income. When you withdraw money it will be taxable. With a Roth IRA, you do not receive tax deductions when contributing, but you do not pay taxes when withdrawing. Thus, if you are in a low tax bracket today, the Roth may be a better alternative.
  • Contribution limits — As of 2020, you can contribute a maximum of $6,000 per year into your IRA (or $7,000 if you are 50 or older). With a 401(k), you can contribute up to $19,500 (or $26,000 if you are 50 or older). If you have enough income, you may be able to contribute to both.
  • Investment options — When you contribute to an IRA, you can choose how you would like to invest your funds. This is usually more flexible than investing in a 401(k), which limits your investment options to a list of options provided by your employer.
  • Withdrawal criteria — With a traditional IRA and a 401(k), you will have to pay up to a 10% penalty if you withdraw your funds before the age of 59 1/2. With a Roth IRA, you can withdraw your original investment at any time without penalty and any earning after five years.

    Important 2020 withdrawal information: The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows account holders affected by the pandemic to withdraw up to $100,000 without penalty, but you must pay taxes. You do not have to pay taxes on these withdrawals if you pay the amount back into the account within three years of the withdrawal. 

Planning for retirement with the help of a ProVise financial advisor

Knowing the difference between the two main retirement options is helpful, but you have to consider how each one benefits your financial circumstances now and which one will be better for you in the long-run before making a decision. This is where our CERTIFIED FINANCIAL PLANNER™ professionals come in.

The ProVise Management Group financial advisors work closely with you to evaluate your current circumstances and review your retirement goals and risk tolerance to come up with a retirement strategy for you. We are highly skilled in navigating the financial landscape to help you make the right retirement decision and we do so at a fiduciary standard of care. 

We create personalized plans for each of our clients at a fiduciary standard of care. We also offer an unconditional money-back guarantee if you are unhappy with your written plan. Simply return it to us, and we will refund 100% of the fee paid.

Are you ready to talk to someone about saving and planning for your retirement? Contact ProVise today to schedule a complimentary consultation.