401k Plan or IRA?

Saving for your retirement is not an option, it’s a necessity. When it comes to the where to save for your retirement, here you have the option.

Lots of people are facing an issue when it comes to choosing between an IRA and a 401k plan. So here is some information to help you solve this puzzle for the best. As far as tax is concerned, both a company provided 401k plan as well as a traditional IRA take the contributions before tax is charged to your salary, thus lowering the balance on which tax is charged.

The 401k plan does have an advantage however. In some companies the employer will match his employees’ contribution which would mean doubling your savings money. Other companies will offer you a percentage of your pay, and this is always something that you should take advantage of, because it is free money!

IRAs come in 2 types. The traditional IRA is the one we have mentioned above, where the contribution is tax deductible. The Roth IRA however, will invest your money post-tax. In this case however, on distribution upon retirement age, no tax is paid, and this is this plan’s major advantage.

So in short, the main 401k plan advantage is the match from the employer and the Tax advantage now, while the disadvantage would be related to the limited investment options that are available for your funds.

In an IRA, you will be responsible for all the investment choices and you will have to decided how much to invest, when and where. This makes this choice very flexible. The other advantage would be that you are able to control your tax liability by diversifying your savings into a Roth IRA and saving on future tax, or else going for a traditional IRA to lower your current tax liability.

Before making your decision, always assess your needs, as well as the risk you would like to take on your funds. Whatever choice you make, is always better than not saving at all.

Reference: http://cashmoneylife.com/2008/02/14/invest-401k-traditional-roth-ira/