Investing in a 401(k) is an effective way to save for retirement. That’s because it offers several advantages, like tax-deferred growth and matching payments from your employer or plan provider. If you’re eligible for both an individual retirement account (IRA) and a 401(k), you may wonder which one will offer you the best value for your money. You might need to select from reliable and trusted 401(k) providers over IRA because it offers:
1. Tax-Free Growth Until You Withdraw Your Money
The other major difference between 401(k) plans and IRAs is that the former is tax-deferred, which means that your money grows tax-free until you withdraw it. You won’t pay any taxes on those investments until you actually take them out of your account, while with an IRA plan they’ll be taxed as income in the year they’re deposited into the account. That can make a big difference over time: if someone invests $1,000 every year from age 25 to 65 (the earliest age at which most Americans can begin withdrawing funds from their 401(k)s, by age 67 (the earliest age for most people to begin taking withdrawals from individual retirement accounts), that initial investment would have grown exponentially—from $1,000 to more than $500,000. That’s why saving in a 401(k) plan has such a tremendous impact on one’s retirement savings.
401(k) plans have a wide range of investment options. The plan includes a variety of investment options that are much more diverse than an IRA. While IRAs may offer mutual funds, they typically don’t offer access to the same range of investments as 401(k) plans do. Additionally, many employers offer additional investment options through their plan (like target date funds), which provide great flexibility for your investments without having to search out additional investments on your own or pay extra fees for them.
3. Your employer may match your contributions
A 401(k)-retirement plan will offer you the opportunity to invest your pre-tax dollars through payroll deductions, which your employer may match into various investment options. The amount they’ll match is usually expressed as a percentage of how much you contribute up to a certain limit.
4. Contributions Limit
Another difference between the two plans is that the amount of money you can contribute to a 401(k) each year is much higher than what you can deposit to an IRA. Currently, the maximum annual contribution limit for a 401(K) is about $20,500. For IRAs, the limit is only about $6000 with pretax dollars.
At the end of the day, it is up to you to decide which plan is right for your situation. But if you have the option to go with a 401 (K) over an individual retirement account, we suggest that you choose the former. Why? because your employer may match some of your contributions and there are fewer restrictions on the amount of money that can be put into these plans each year compared with IRAs. In addition, 401(k) has more investment options and is tax-deferred.