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Many individuals feel all the choices that are open when it concerns retirement planning to be quite vague. In Case you are one of those this article is dedicated to explaining the differences between a 401 (k) plan and an IRA (Individual Retirement Account). There will be a lot of words you will discover during your inquiry that will be somewhat vague until all the terms are clear to you.

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Let’s first look at the 401 (k) plan. This is a program that offers a few benefits that are much preferable to many over other retirement plans. What you may consider for a start is that you can invest up to 15% of your earnings or a maximum of $15,000 each year (as of 2006). Of course that is taking for granted that your employer doesn’t have limits on how much you can invest. The money invested in your 401 (k) account is pre tax money thus it lowers the amount of taxes you are paying out of each paycheck. Numerous folks also feel that because the money is taken from their checks before it arrives it is far less painless to part with. As someone who has closely watched taxes, FICA, and Fido get my money for years I can state that it is no less painful for me but some find it fine and that is a serious benefit. Lastly and maybe the most crucial matter to consider is that a lot of employers will match a percentage of your part up to a certain amount every check. As an employee this is a boost to your investment that is well deserved and hard earned.

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IRAs are different. You will see much stricter limitations on IRAs than on 401 (k) plans starting with the fact that in case your employer offers a 401 (k) you must make not much money in order to qualify for the tax deductions that this particular retirement fund generally allows for. The maximum yearly contribution for your IRA will be $4,000 or 100% of your one-year income; whichever is bigger up until the age of 49. From the moment you’ve made the age of 50 you can invest an additional $1,000 to your fund. The other major drawback when it comes to an IRA is the fact that you must begin taking payments at the age of 70.5 from your account. You will as well be heavily penalized in case you make an early withdrawal from these funds.

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Whether you prefer a 401 (k) plan, a Traditional IRA, or both for your financial retirement investments, I hope you will take the time to discuss the benefits and disadvantages of each with your financial advisor before making your final conclusion.

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