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When it comes to saving for the golden years of retirement, there are different choices that are available to you. Two of the popular retirement saving options include the 401(k) plan and the individual retirement account. While both plans have some similarities, it’s important to understand their differences.
Both the 401(k) and IRA offer tax benefits like tax-deferred investments and the ability to invest in different kinds of assets like stocks and precious metals. But the main difference is that individuals open IRAs on their own through a custodian while employers offer 401(k)s.
In this guide, we will explore both retirement plans and help you choose the ideal option for you.
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What is a 401(k)?
A 401(k) plan is a retirement plan that is sponsored by your employer. The plan allows the workers of the company to save for retirement while getting some tax advantages. When you save in a 401(k) account, your money can grow tax-free or tax-deferred until it’s time for the withdrawal. Every month, the employees will deduct a part of your salary and invest it in high-returning assets through the 401(k).
In 2023, the annual contribution limit to a 401(k) is $22,500. If you’re 50 years old or over, you can add $7,500 to your yearly contribution to catch up. But you can only save in a 401(k) account if your employer offers it. Employees will have the contributions automatically deducted from their paychecks and placed in the retirement account. If you decided to invest your money, this would be done automatically.
Some employers will match their employee’s contributions, about three to five percent of their paycheck, making it easier to meet your retirement savings goals.
Types of 401(k) Plans
There are two types of 401(k) plans which are traditional and Roth. Both plans are different based on the tax advantages they offer.
Pros and Cons of 401(k) Plans
There are different pros and cons you can expect with a 401(k) retirement plan. The pros include:
You should also consider some downsides of the 401(k) plan:
Employer Matching Contributions
If you have a 401(k), you can get free money through company or employer matching contributions. Many employers provide matching contributions up to a percentage of your salary. For instance, if your salary is $50,000, your employer might offer a match of 5%. That would be $2,500. So, your employer would pay $2,500, and you will pay the same into your 401(k), increasing your savings.
What is an IRA?
IRA stands for an individual retirement account, and this is an account that allows you to save for retirement by yourself. Unlike a 401(k), you will open and contribute to the IRA by yourself and expect tax advantages. The IRA allows your money to grow tax-deferred or tax-free until it’s time to retire. You can even benefit from the compounding rate, allowing your retirement savings to accumulate over time.
The annual contribution limit for an IRA in 2023 is much lower than the 401(k). It is set at $6,500 per year. If you’re over 50 years, you can make catch-up contributions of $1,000 yearly. You can open an IRA through a custodian and invest in stocks, bonds, CDs, ETFs, mutual funds, and precious metals.
Types of IRAs
There are different types of IRAs that you can use to prepare for retirement, and they offer different tax advantages.
Recommended Companies for Precious Metals IRAs
Holding gold and other precious metals in your IRA has become a popular option among investors. This is because gold is a store of value and an inflation-proof asset, so it retains its value even during economic downturns. If you’re interested in opening a precious metals IRA, here are some recommended companies to get started with.
Augusta Precious Metals is a reputable gold investment company that offers precious metals IRAs. The company has IRS-approved gold, silver, platinum and palladium. It offers one-on-one customer service with customer education and experts that help you with all the IRA paperwork. But, the minimum required amount is $50,000, which is a bit high.
Goldco is a well-known gold IRA investment company that offers a minimum investment amount of $25,000. The company only offers gold and silver IRAs which is a bit limited. There are flat annual fees to consider, but it is affordable, and you can choose between segregated and non-segregated storage for your precious metals.
If you want to open your IRA on a budget, you should consider American Hartford Gold. The company offers a minimum investment amount of $5,000 and can even waive your fees for three years. You can enjoy their reliable customer service and price match guarantee. The company also offers different kinds of promotions.
Pros and Cons of IRAs
There are different pros of an IRA that you can look out for. The most important options include:
You should also consider some downsides of opening an IRA.
Which is Better Between, a 401(k) or an IRA?
Now that we’ve explained the 401(k) and IRA plans let’s compare their differences. It is usually recommended to get the advantages of the two plans by maxing out your contributions to both. But, if you cannot afford to save in both, you should choose one based on your options.
If you have a secure job and your employer offers a 401(k) plan, then this would be a good option, especially if your employer will match your contributions. If not, you should go for an IRA as you can manage the retirement account yourself and benefit from the tax advantages.
Here are some benefits that the IRA has over the 401(k):
There are some advantages that 401(k) plans offer over IRAs. These include:
Recommended Strategy for Choosing Between 401(k) and IRA
If you’re still unsure about which you should choose between the 401(k) and IRA, you can follow a different strategy.
For one, check if your employer offers a 401(k) with a company match, then put enough money in it to get the maximum match. This would allow you to save a lot in the 401(k) since your employer will add to it. Once you get the match, you should then save it in your IRA. Since the IRA has a lower contribution limit, you can max it out for the year. Then, move back to your 401(k) and keep making contributions for the rest of the year. This allows you to take advantage of both retirement plans.
On the other hand, if your employer does not offer a 401(k) plan or you are self-employed, you can consider opening a traditional, Roth or precious metals IRA. When working with a broker or custodian, you can get access to different assets to invest in. You can also open a solo 401(k) if you are self-employed. All in all, having an IRA will offer different benefits since you can widely invest for your retirement.
The ideal retirement plan for any individual would be to combine an IRA or a 401(k). But, if you cannot afford to open both, you should consider your income, the options available to you, and what asset you would like to invest in first. When you understand the differences between the two retirement plans, you can make the ideal choice for your future and start saving for your golden years.