Dear Daughters Loves Mom

Retirement Planning with Retirement Accounts! Which one is best for you Learn the difference

Dear Daughters,

The two most common retirement plans are the Individual Retirement Account IRA vs. 401 (k) 403(b)plan. Both have advantages and disadvantages, but which is right for you?

If you are like most people, you have a retirement account of one sort or another. And if you are like most people, you probably don’t know much about the two main types of retirement accounts: the individual retirement account (IRA) and the 401 (k).  An IRA is a type of retirement account that is typically favored by people who want to save for their own retirement. An IRA allows you to save money in a tax-deferred plan.

  1. Individual retirement accounts (IRAs) and 401 (k) 403(b)plans are two popular retirement savings options.
  2. The biggest difference between these two plans is that IRAs can be used to save for retirement income, while 401 (k)s can only be used to save for retirement expenses.
  3. IRA contributions are tax-deductible, while 401 (k) 403(b) contributions are not.

IRA vs. 401(k): How to Choose

Many people find the many options available in retirement planning confusing. This article will explain the differences between a 401(k) 403(b) plans (Individual Retirement account) and an IRA (Individual Retirement Plan).

Strengths and weaknesses

IRAs and 401(k)  403(b)plans have their strengths and weaknesses when it comes down to financial retirement planning. They can only be as beneficial when combined and have their own limitations. Before jumping on any benefit that can help you with taxes or retirement, it is important to carefully consider it.

Pension Plans
The 401(k) is the retirement plan that is used the most frequently. Employees can contribute pre-tax income to a 401(k), an employer-sponsored retirement plan. Employers that provide 401(k) plans may match employee contributions and/or include a profit-sharing component in the plan. Additionally, 401(k) plan earnings are tax-deferred. 401(k) plans are provided by private, profit-making businesses. The IRS imposes a 10% penalty tax on withdrawals made before the age of 59 1/2. There are, however, certain exceptions.

  • When a worker turns 50, they can start getting withdrawals from their 401(k).
  • Withdrawals made due to hardship are also immune from any further IRS fines.

403(b)
For employees, tax-exempt organizations, and government workers like teachers, professors, nurses, doctors, and even librarians, a 403(b) plan provides a retirement savings option. Mutual funds or annuities are the only available investment options for these plans. The tax structure for 403(b) plans is the same as that for 401(k) plans. Since 403(b) contributions are paid with pre-tax income, tax responsibilities are postponed until retirement. Additionally, the same penalty tax is imposed on distributions made prior to turning 59 1/2 or in the absence of qualifying circumstances.

IRAs are a different creature altogether.

 

Traditional IRA

Everyone’s definition of retirement is unique. We all have the same desire to make sure we have enough money saved to live comfortably. Traditional IRAs from Mutual Funds are available as potential tax-deductible solutions to increase your retirement savings.

People who: Have earned income should consider traditional IRAs.

  • to postpone paying taxes till retirement
  • In retirement, anticipate a reduced tax bracket.
  • would profit from a possible straight-forward federal income tax reduction
    They won’t likely need to withdraw any money from the account until retirement (after turning 5912)

Roth IRA

A Roth IRA with  Mutual Funds is an individual retirement account to which you make contributions with money on which you’ve already paid taxes. With a Roth IRA you have the potential to take tax-free withdrawals of earnings in retirement.

Roth IRAs are a great choice for people who:

  • Have earned income
  • Expect to be in a higher tax bracket in retirement
  • Would benefit from federal tax-free distributions of earnings in the future
  • Don’t want to be subject to Required Minimum Distributions
  • Want the flexibility to withdraw contributions at any time
  • you can put money into with already taxed money

IRAs have more restrictions than 401(k) 403(b)plans. If offered a 401(k), you will need to make very little money for this retirement fund to allow tax deductions.

Carefully consider all of your options for retirement investing before deciding which type of account or accounts will be most appropriate for you. Talking to a  financial advisor will help you make your final decision.

 

As Always,

Loves Mom

 

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