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!
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!
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.
Search online
Check with your current employer
It may have automatically rolled over to your new employer
Which is better to have?
So now it’s time to do a versus!
Nobody’s gonna battle the mic, lol, but you’ll get the pros and cons of both and learn why it’s important to have one or both of these accounts.
As I stated earlier, they both are retirement accounts, but with everything in life, you have to look at things with a realistic lens.
So the pros and cons to having a Traditional 401K are:
Pros
You’re allowed to borrow against it
Most 401k plans employees will match a certain percent of your contribution
You can contribute a higher amount to your plan
You can easily rollover funds
Tax deductible
Cons
Your employer controls your investment options
You will have fees higher fees and costs with this type of account
Now, let’s take a look at the pros and cons of a Traditional IRA:
Pros
You control where your investments go
You control the costs and fees
You can easily rollover funds
Tax deductible
Cons
You’re limited on what you can contribute
You have no employee matching
No loans are allowed but you can withdraw money
With the pros and cons all laid out, you may want to look into having both a 401k and IRA plan.
It’s great to have your employee match your contributions and have no limit on what you can contribute toward your retirement.
You get that in a 401k plan.
However, to have all your golden years depending on one investment may not be the wisest thing to do. Therefore, if you can afford to contribute to both, you should.
Major Take Away
As soon as possible check with your employer to see if you have a 401K, if you don’t, you may want to get one as soon as possible if they offer one.
You can contribute a small portion of your paycheck to your account. If your employer doesn’t offer 401k savings, try an IRA instead.
Something is better than nothing so add it to your financial to-do list.
If you have a 401k, you’re off to a great start, but you may want to look into diversifying your assets by starting an IRA account as well.
Having the power to choose is empowering.
Lastly, if you were ever apprehensive about investing, remember with these accounts your already doing it.
So look into taking it to the next level.