Retirement Account Basics: 401k vs. IRA

Financial Education > Retirement Account Basics: 401k vs. IRA

January 11, 2021
retirement_accounts

Many of us have retirement accounts through either employers or of our own contributions.  Two of the more common today are the 401(k) Plan and the Individual Retirement Account (IRA).  Both have a variant known as a Roth, and all four allow for your investments to grow tax free. Each has certain features, tax benefits and distribution requirements. We’re here to help you distinguish between these types of accounts, learn more about each and how they will benefit you.

The 401(k) is a type of employer sponsored retirement plan.  Employees and employers are able to make contributions up to certain limits.  For 2021, each employee can contribute up to $19,500.  If you are age 50 or over and your employer allows for it, you can contribute an additional $6,500 in catch up contributions.  Employee contributions are tax deductible and employer contributions are not taxed to the employee when contributed.  Employees generally must begin to take Required Minimum Distribution (RMD) at age 72. All distributions are subject to regular income tax, and if you are under 59 ½, a distribution is subject to an additional 10% tax penalty.  Be sure to review your beneficiary designation at least annually.

The Individual Retirement Account (IRA) can be opened by any individual with earned income.  Contributions are generally tax deductible.  The total contribution limit to all of your IRAs and Roth IRAs is $6,000 for 2021, or your taxable compensation, whichever is less; $7,000 if you are over age 50. Just like a 401(k), Required Minimum Distributions start at age 72.  All distributions are subject to regular income tax, and if you are under 59 ½, a distribution is subject to an additional 10% tax penalty.  Be sure to review your beneficiary designation at least annually.

The Roth 401(k) and Roth IRA are different from the traditional accounts above.  The biggest difference is that contributions are not tax deductible.  But, distributions are not taxed and there is no required minimum distribution. 

Always be aware of which account you have and keep track of your beneficiaries. If you’re ready to start planning for your retirement, visit our Financial Planning with Northeast Planning Associates 3rd party website page for more information.