Ira Comparison

401K Vs IRA - What's The Real Difference?

Many people who are preparing to make the financial jump into either a 401K or an IRA are often torn between the two. On the surface the two financial plans seem to have quite a bit in common. They both serve as great ways for a person/ couple to save toward retirement. They both offer great benefits and great interest rates, as well as a multitude of plan options. They both seem to have everything together but it is the difference between 401K and IRA plans that things so complicated. Let’s take a closer look. From the outside it appears that IRAs and 401ks have government set limits on how much pre-tax money you can put into your account. While this is true and you have to have an understanding about what you can and cannot put into your account tax free, 401ks actually allow more money to go in pre-taxed then IRAs do. While this seems like it is a slight detail it can actually be quite profound once you start putting away your hard earned thousands into your account. You will see how quickly those thousands churn interest at that high of a rate.

Another positive of 401ks that IRAs usually do not include is employee matching. Now this is something that you would have to talk with your employer about but it is true that many employers will match a certain percentage of an employees deposit each year. Talk with your employer to see if they are involved in any such program because if they are you just earned yourself quite a pretty penny more! A few more differences:

• You can borrow money against your 401k (which may or may not be such a good thing depending on your credit) while you cannot borrow against an IRA. Any borrowed money against a 401k however must be paid back according to the time schedule agreed upon.
• Even if you under the retirement age you can withdraw money from your 401k if you need it for medical bills or other expenses that put you in a tough position. The only real way this can be done is if the expenses are tax deductible (you cannot make withdrawals and buy a new car with the cash!).
• IRAs usually come attached with many more plans while 401k plans are usually set for you. If you like choice and flexibility with your finances you may like a traditional IRA.
• IRA accounts allow you to make changes with your account almost instantly. There is no standard time to change with most IRAs, like there is with 401k plans.