Know the differences and choose the one that best suits you.
If you are thinking about how you can save to be financially stable during retirement, you could consider opening an IRA or enrolling in the 401 (k) retirement plan. However, in order for you to choose the plan that best suits you, you must know the advantages and disadvantages of both retirement plans.
The 401 (k) plan
The 401 (k) is a very popular retirement plan, this plan is offered by some companies to help their employees save for retirement. If you decide to join the plan, you will make monthly contributions that will be automatically deducted from your salary. This money you deposit in the 401 (k) will be exempt from paying federal taxes, until the time the money is withdrawn. With the 401 (k) you can contribute up to $ 19,000 to your account in 2019, as long as your contribution does not exceed your income for the year.
Most companies that offer this retirement plan They provide their employees with a series of incentives or provide a sum of money to match the worker’s contribution. For example, they can contribute 50 cents for every dollar the employee contributes to the plan.
In order to withdraw your 401 (k) funds without fines and taxes, you must wait until you are 59 1/2 years old. According to the IRS, if you withdraw your savings before age 59 you have to pay a 10% penalty, in addition to income taxes. However, when you withdraw your 401 (k) funds you will have to pay for accounting and administration costs which can reduce savings.
If you are interested in knowing how you can effectively save for your retirement with this plan, you can read this article: How to be a millionaire with the 401 (k)?
Individual retirement accounts (IRAs)
IRA accounts are savings accounts that are designed for retirement. Most banks and cooperatives offer these types of high interest accounts so that your money can grow.
There are two types of IRA accounts: the traditional IRA and the Roth IRA. With a traditional IRA account, contributions you make to this account are tax deductible up to the maximum that the Internal Revenue Service (IRS) allows and will not owe taxes until you withdraw the funds. On the other hand, if you have a Roth IRA the contributions you make are not tax deductible, however, when you withdraw the funds you will not have to pay taxes because you have already paid them.
IRA accounts are also assigned a limit of contributions that can be made per year. These limitations may be $ 5,500 a year or 100 percent of earned income, whichever is less. However, individuals over the age of 50 may contribute up to $ 6,500 or 100% of earned income, whichever is less.
IRA accounts allow you to withdraw funds at any time, but some banks may charge penalties for withdrawing money earlier than stated in the contract. When you turn 70 and a half, you must take a minimum required distribution of your IRA.
Before choosing a retirement plan, you must take into account the following factors:
- Limit of contributions you can make per year
- When can you start receiving benefits?
- Penalties and fines if you withdraw money early
- Know if contributions are tax deductible
Which one should I choose?
Finance expert Dayana Yochim explains in an article she wrote in NerdWallet that you should choose a 401 (k) plan if it is offered by the company you work for and if your employer makes contributions to your plan. However, if your employer does not make 401 (k) contributions, Yochim recommends that you open an IRA and contribute as much as possible.
Some IRA accounts that you can consider are:
With Capital one you can open a traditional IRA or a Roth IRA. The interest of Capital One IRA accounts is 1.00%. Although, Certificate of Deposit IRAs have a higher interest rate that can go up to 2.70% APY. Most Capital One IRAs have no monthly fees and do not require a minimum deposit to open the account.
The cooperative Connexus offers different types of IRAs that you can use to save for retirement. For example, if you join the Supreme Account program the IRA account offers an interest rate of 1.50% APY and the certificates can get an interest rate of 3.50% APY. The Connexus IRA account does not require a minimum deposit to open it.
It may interest you: 4 methods to save a lot of money
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