Are you interested in saving for retirement but don’t know where to get started? Most employers offer a retirement savings plan such as a 401(k), but if this option isn’t available to you or you want to maximize saving for retirement, you can look to other savings vehicles. For this reason, many people use individual retirement accounts (IRAs) as part of their retirement savings plan.
Here’s a look at the differences between IRAs and 401(k)s.
An IRA is designed specifically for retirement savings. Unlike other savings accounts, when you open an IRA you may enjoy tax-free growth on your earnings. There are two basic types of self-directed IRAs, each with their own unique benefits.
A Traditional IRA lets you save money on a tax-deferred basis. This means the money in your account can grow tax free until you reach your retirement age. As long as you are earning money and are younger than 70 ½ years old, you can open a Traditional IRA.
If you open a Roth IRA account, contributions are made after taxes, so you can’t deduct them or receive immediate tax savings. One benefit of Roth IRAs is that unlike Traditional IRAs, Roth IRAs don’t have an age cap of 70 ½ for contributions, nor do they have disbursement requirements.
A 401(k) is a retirement savings plan sponsored by your employer in which the company typically matches your contributions up to a certain percentage of your salary. For example, your company may match any contributions you make up to five percent of your salary; to make the most of this savings program, you would want to contribute at least the maximum amount matched annually. Speak to your HR department to find out more about the 401(k) program offered by your company.
Participating in your employer’s 401(k) plan is an excellent way to start saving for retirement. But that doesn’t have to be your only method of saving — opening an IRA can help you save even more and may confer a number of additional benefits. The chart below can help you compare the advantages of 401(k) plans, Traditional IRAs, and Roth IRAs so you can learn how each benefits you.
|Traditional IRA||Roth IRA||401(k)|
|Sponsored by employer||X|
|Contributions matched by employer||X|
|Contributions eligible for tax deductions||X||X|
|Money taxed upon withdrawal||X||X|
|Annual max contribution*||$5,500||$5,500||$18,000|
|Annual max contributions after age 50*||$6,500||$6,500||$24,000|
*Subject to change based on IRS rules. Amounts accurate as of December 2, 2016.
To learn more about how to save for retirement, Ask a Citizen at your nearest Citizens Bank Branch.
Disclaimer: Views expressed may not necessarily reflect those of Citizens Bank. The information contained herein is for informational purposes only as a service to the public, and is not legal advice or a substitute for legal counsel, nor does it constitute advertising or a solicitation. You should do your own research and/or contact your own legal or tax advisor for assistance with questions you may have on the information contained herein.