Are you trying to save money for your future? Let’s talk about retirement accounts: 401(k)s, IRAs. Which would be the best for you? Each one comes with great tax benefits, but here are their differences. It’s a little boring, but you should know this!
Why you never want to turn down a 401(k)
You never want to turn down a 401(k), especially if your company matches your contributions. You don’t need a specific amount of money to start a 401(k); any income is eligible to start. Many companies will actually match dollar for dollar what you put into your account up to a certain limit. You’re basically doubling your money for free just by putting it in a savings account. Never turn down free money! If you put money in your 401(k), it also lowers your taxable income.
However, there are some downsides to having a 401(k). You don’t get any control over your plan or investment costs, and there is a limited investment selection. It is more of a set-and-forget option. You’re not supposed to touch the money until you retire. If you withdraw before then, it’s taxed as regular income, there are penalties, and you can’t start making distributions to yourself until the age of 62.
What is an IRA?
If your job isn’t offering you a 401(k) and you want a more hands-on approach to retirement, try an IRA. They can also reduce your taxable income for the year, and you’ll have a much larger investment selection. There are two types of IRAs: traditional IRAs and Roth IRAs.
The main difference between the two is how and when your money is taxed. For traditional IRAs, you get a tax break immediately. But you have to pay taxes when you withdraw your money during retirement, just like a 401(k). Roth IRAs are a little different. You don’t get any tax breaks to begin with, but you don’t pay taxes later. The government always gets its money; it’s a question of timing.
Hopefully, this clears up retirement accounts. It’s not the sexiest topic, and you probably have a lot of questions, so leave them in the comment section!