IRA vs. 401k: Which is best?

explaining difference in investments

Saving for retirement can seem overwhelming. On top of setting aside money, you also need to choose the right retirement accounts. The most popular options are a 401(k) and an IRA. Both plans offer tax-deferred growth on investments, tax breaks, and the ability to earn a large return.

While similar, they also have some key differences. Many people have both accounts and invest in each differently. Learn how they can help you reach your retirement goals.

401(k)

Employers sometimes offer a tax-deferred retirement savings account called a 401(k). Individuals can’t open and invest in this type of account. Many employers (though not all) offer to match your 401(k) contributions up to a certain amount. This means if you contribute a percentage of your salary, your employer matches that percentage. Most businesses will match anywhere from two to six percent. If you qualify for a match, it’s a great opportunity for a huge return on your investment. 

A 401(k) plan also has a high maximum annual contribution limit. In 2020, it’s up to $19,500 a year. This means contributing to a 401k could lower your taxable income.

IRA

An IRA is an individual retirement savings account that is available to any individual. It’s not tied to an employer. Different types of IRAs offer different benefits. Two of the most common account types are traditional and Roth.

A traditional IRA gives greater access to investments like stocks, bonds, CDs, and real estate. With an IRA, the maximum annual contribution limit is $6,000. But, you may be able to deduct your contributions, which helps reduce your taxes for that year. Additionally, you won’t owe income taxes on your savings until you withdraw the money later.

A Roth IRA has all the same investment benefits of a traditional IRA, but you pay taxes upfront instead of when you withdraw your money. This means your investments and earnings grow tax-free. Once you qualify for withdrawals, you can withdraw with no tax implications.

Learn How a 401(k) or IRA in Waco Can Help You Reach Retirement Goals | TFNB Your Bank for Life

Which is best for you?

Now that you know how these plans work, it’s time to figure out which best suits your financial goals. There are many factors to take into consideration. These include your employment status, tax bracket, and the percentage of income you invest.

You may want to take advantage of a 401(k) if you:

  • Work for a business that offers a 401(k)
  • Have an employer matching program
  • Can contribute more than $6,000 a year
  • Want to make a lower-risk investment
  • Want less taxable income this year

An IRA may be a good investment decision if you:

  • Are self-employed or a contract worker
  • Want to delay taxable benefits
  • Want more investment options at varying risk levels
  • Want more flexibility with withdrawals
  • Can’t contribute more than $6,000 a year

It’s possible that you don’t have to decide between the two options. Using both an IRA and a 401(k) is a great option to increase your savings and lower your taxable income. Even if your employer offers a 401(k) plan, you can still contribute to a personal IRA. But, you may not get tax-deductions from your IRA contributions if you also have a 401(k). You can still contribute the maximum annual limit of $6,000. After reaching your 401k max, adding an IRA to your retirement plan can give you more investment options. A Roth IRA can also be a source of tax-free income after you retire.

Learn About our Retirement Savings Options in Waco

Both plans offer great opportunities to save for the future. Consult a professional to find a plan that works best for you. At TFNB, our local bankers can help you set up an IRA or learn more about other saving and investment options available to you. 

Want to open an IRA in Waco or McGregor? Fill out this form or contact us at (254) 840 – 2836 and our team will be happy to help.