401k And Ira
401k And Ira
401K And IRA - The Different Types Of Retirement Accounts
There are many great retirement tools available to the average working person. Two of the most popular forms of retirement investing are the 401K and the IRA. Even though 401K and IRA are some of the most common methods, there is still some confusion about them. Here is some basic information about each type of account.
A 401K is offered by one's employer. The employee contributes a certain percentage of their salary into the 401K account. The employer offers to match the employee's contribution up to a predetermined percentage, usually three to six percent. Beyond the match point, employees can contribute depending on their salary. The employee can usually choose from a variety of investments to allocate their 401K funds to and can choose to purchase stock options. The larger the employer, the more fund choices are typically available.
The money contributed to a 401K account is usually before-tax money and it grows tax deferred. There is also a Roth 401K option that allows employees to contribute after tax money. When an employee turns 70 and a half they must begin making minimum withdrawals unless they are still working. These 401K withdrawals, or distributions, are then taxed. If one withdrawals the funds in their 401K before the proper period, then there are hefty penalties involved except for special circumstances.
An IRA is another great retirement savings account. IRA stands for Individual Retirement Account (IRA). As the name implies these are sole ownership accounts, however, beneficiaries can and should be designated. There are many different types of IRA accounts. Each investor should speak to a financial expert or research the different options completely before deciding which IRA account is right for them.
A Traditional IRA account is established with after tax funds. These funds grow tax deferred until they are withdrawn. Traditional IRA yearly contributions are typically able to be claimed as a tax deduction. They are put into an account with a certain interest rate for a certain period of time. After that time period is up, the IRA account may be renegotiated for another term at the current interest rate.
The Roth IRA is another popular IRA account. These IRA accounts allow the contributer to use after tax funds. These funds cannot be claimed on one's taxes and are usually able to be withdrawn tax free.
There are other specialized types of IRA accounts that are designed for specific circumstances. The SEP IRA account lets an employer choose to put funds into an IRA in an employee's name in lieu of offering a pension account. A SIMPLE IRA account is similar to a 401K account, but it has lower contribution limits. It also has lower administration costs so it allows small businesses to offer a retirement plan to their employees at an affordable cost. The last type of IRA is the Self-Directed IRA account. This IRA simply lets the owner make their own investments on behalf of the IRA. All of these different choices can leave investors overwhelmed. It is important to have some type of retirement plan in place, and contributing to your employer's 401K program should be your first step. After that, some type of IRA is a good idea as well. Review all of your choices and make an informed decision about your IRA and 401K needs.