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401k or an IRA, Which do I have and Which should I get?

Updated: Apr 20

You may have started thinking about your finances as you get a little older, will you be able to maintain your lifestyle, or enjoy the fruits of all your labors?

Will you be able to still afford health care, emergencies, and trips with family and friends?

With 40 being the new 20, that means at 65 you’ll be 45 at heart with enough time left to continue to enjoy life to the fullest!

Understanding retirement options can be nerve wrecking, but planning for your future is the best decision you could ever make.

With all that life left in you, you’ll need a way to support yourself.

If you’ve been working all your life, you should have that support through your company's 401K plan or an IRA.

Ever heard of them?

If so, how’s yours doing, could you be doing more to contribute towards your retirement?

If not you have not heard of a 401k or IRA, you should really pay attention to these insights.

What are Traditional 401K and IRA accounts in simple terms?

A 401k is a retirement savings account that is offered to you by your employer through an investment plan.

Some jobs will automatically make withdrawals from your paycheck into your 401k, while others allow you the choice because they also withdraw for social security.

Whether your 401k is voluntary or mandatory at your place of employment, it is important to have one.

Now what if your job doesn’t offer a retirement plan like 401k, that’s where an IRA comes into play.

An IRA or Individual Retirement Account is a savings investment account you can open on your own through an investment bank.

Banks like Fidelity, SOFI, and Merrell offer IRA accounts.

Both accounts allow you to save money for your future. This is important because in all honesty despite how you might feel, no one is young forever.

What are Roth 401k and Roth IRA?

You may have heard the terms Roth 401k or Roth IRA and wondered, what’s that?

The difference between a Traditional 401k and a Roth 401k is when you pay taxes. Ask yourself, do I want to get taxed now or later?

With a traditional 401k you contribute using pre-taxed dollars, so your tax break is up-front. You’ll notice this deductible every year when you file your tax return.

This is why when you choose to do an early withdrawal, you have to pay the 10% penalty tax on the amount.

However, with a Roth 401k, the funds contributed are after-tax funds, so you can withdraw at any time with no penalty tax. But you don’t get the upfront deduction.

Now the difference between Traditional IRA and Roth IRA is the tax breaks.

Created as part of the Taxpayer Relief Act of 1997 and named U.S. Senator William Roth of Delaware, these types of accounts were created for those in lower tax brackets looking for tax diversification and retirement flexibility.

Unlike traditional accounts, Roth IRA accounts also require a modified annual gross income (MAGI) to participate.

The MAGI must be about $123,000 if you file single, head of household, or married filing separately and about $204,000 if you file married and filing jointly or qualified widow and widower.

How to check if I have a Traditional 401K or IRA?

To determine whether you have an IRA account is easy, did you ever set up one for yourself?

No, well, no you don’t have one.

This account is set up by you in addition to a 401k if your job offers a 401k.

It is also set up if by you if you are self-employed and are responsible for your own retirement plan.

Now, how to check if you have a 401k, you can simply look on your paystub to see if money is being deducted towards your 401k.

Do you see it? Well if you do, you are paying into your 401k plan, congrats!

Check to make sure you have a 401k and that your funds are vested.

Now if you think you have one from previous employment, there are several things you can do:

Check your personal financial records

  • You may have old records lying around with the information your need.

Check with the former employer

  • Contact the Human Resource Department

  • They should be able to tell you where they invest and your account will still be with that company.