Is a Traditional IRA Better Than a 401(k)?

While both traditional IRA and 401(k) accounts offer tax deferred investments and tax breaks on contributions, their differences must be understood to select one that will best meet your retirement needs.

Early in your professional career, cash flow will likely be of the utmost importance: Salaries may be lower; daycare costs can be significant and home mortgages are an all too familiar occurrence.

Taxes

While IRAs can be an excellent retirement savings vehicle, it’s essential to consider their tax implications carefully as these accounts could have a major impact on your savings plan. Contributions could potentially reduce your overall tax bill and you can take advantage of tax-deferred investment growth.

If you make contributions to a traditional IRA without deducting them as tax deductions, tax is due when withdrawing funds; however, you won’t incur an early withdrawal penalty of 10% prior to age 59 1/2 unless they’re used to purchase either your first home or qualified small business.

Your options for opening a traditional IRA include banks, financial institutions, life insurance companies, mutual fund firms and stockbrokers. When searching for the ideal rates and fees to maximize savings growth. Convert funds between accounts as necessary – for instance to lower future tax bills by moving them from traditional into Roth accounts.

Investments

Traditional IRAs provide investors with access to an array of investments, such as bonds, mutual funds and exchange-traded funds. Individual investors can select investments based on their needs, risk tolerance and retirement goals while reaping tax-deferred investment growth.

Dependent upon your income, contributions to a traditional IRA could be tax-deductible and earnings tax deferred until withdrawn in retirement. At that point, your tax bracket might have dropped and this delay in taxes can help accelerate wealth building faster.

An Individual Retirement Account, or IRA, gives you more investment freedom than your employer-provided 401(k). While life insurance contracts, collectibles, derivative instruments and certain other investments may be prohibited from an IRA account, gold and cryptocurrency are usually not. You can open one through either an online broker or with many robo-advisors that use automated technology to select investments based on your goals and investing horizon at a much more reasonable cost than traditional investment managers might charge.

Rollovers

If you own a traditional IRA, your funds can be moved into another provider with lower fees or even robo-advisors that will manage and select investments over time.

If you plan to rollover from an employer-based retirement account such as a 401(k), such as into an IRA, make sure that the 60-day rule is adhered to so as to avoid taxation on pretax contributions and earnings. Failing this deadline may lead to taxes being withheld from these earnings as well as being hit with an IRS penalty if under age 59 1/2; you’ll also lose any protections provided by your previous plan against creditors and bankruptcy judgments.

Fees

If your employer doesn’t provide retirement benefits, traditional IRAs can help you plan for the future. Contributions can be made with either pre-tax or after-tax dollars; investment earnings grow tax deferred until it comes time to take withdrawals in retirement.

Retirement withdrawals are generally taxed as current income, making it essential to consider your tax bracket when planning for retirement.

Your IRA can easily be moved between accounts when you switch jobs or retire, as well as switching into another type of retirement savings account (Roth IRA or 401(k).

Fees associated with your IRA investments can have a dramatic effect on returns. When selecting accounts, take into account their total cost of ownership including management fees, platform charges and inactivity fees.


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