When it comes to retirement accounts, there are a lot of options out there. It can be overwhelming trying to figure out which one is best for you. Do you go with a 401k, an IRA, or a Roth IRA? What’s the difference between them, anyway? And how do you know how much to contribute?
Don’t worry, we’re here to help. In this blog post, we’ll break down the different types of retirement accounts and their benefits, so you can make an informed decision about which one is right for you.
401k vs IRA vs Roth IRA: What’s the Difference?
The main difference between a 401k and an IRA is that a 401k is offered through your employer and an IRA is not. With a 401k, your employer may offer to match your contributions up to a certain percentage. For example, if you contribute 5% of your salary to your 401k, your employer may match that 5%. With an IRA, there is no employer contribution.
Another difference between a 401k and an IRA is that you can typically contribute more money to a 401k than an IRA. For 2020, the contribution limit for a 401k is $19,500 per year (or $26,000 if you’re over 50). The contribution limit for an IRA is $6,000 per year (or $7,000 if you’re over 50).
A Roth IRA is similar to an IRA in that it’s not offered through your employer and there are annual contribution limits. However, with a Roth IRA, you contribute money that has already been taxed. This means that when you retire and start making withdrawals from your Roth IRA, those withdrawals are tax-free.
Benefits of Each Type of Retirement Account
There are benefits to each type of retirement account. With a 401k, you get the benefit of having your employer match your contributions (if they offer that). And because the money goes into your 401k before taxes are taken out of your paycheck, it can help lower your taxable income for the year.
With an IRA, you have more control over how your money is invested than with a 401k. And if you qualify for a Roth IRA—meaning your income is below a certain amount—you get the benefit of tax-free withdrawals in retirement.
There’s no right or wrong answer when it comes to choosing the right retirement account for you. It depends on factors like whether or not your employer offers matching contributions and how much control you want over where your money is invested. Ultimately, the most important thing is that you start saving for retirement now so that you can enjoy a comfortable retirement later on down the road.
Source: Forbes
The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. Please consult your certified financial advisor.