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Some Key Differences Between IRA and 401(K) Accounts

Some Key Differences Between IRA and 401(K) Accounts

Planning for retirement is a very crucial thing. It’s a decision that all of us will have to make at some point, however, people don’t talk about that enough.[1] Pensions are becoming non-existent. Those who are receiving them are most likely to be our grandparents. They’re guaranteed a certain amount of money from their retirement day through the remaining years of their lives. Unfortunately for our generation, we won’t be benefiting from such a privilege.

Therefore, it becomes even more important for us to start thinking and start planning for our retirement.

When we talk about retirement, there are usually two popular options that come to mind. The first one and the most recognized one is the 401(K). The second one is the Individual Retirement Account, or IRA.

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Although IRA and 401(K) accounts are the two most common contribution plans to retirement, they both do have their differences. One might be the right fit for you, while the other is way off base for what you need. Surprisingly, some people manage to have both of them.

What you should know about an IRA account

An Individual Retirement Account, or an IRA, gives anyone the opportunity to contribute to their retirement. You’ll have to be under the age of 70 in order to be qualified.

One thing I like about IRA is that you can own Gold as your asset. Yes, I mean it. You can literally own gold and other precious metals. However, you’ll need to conduct your research in order to pick the best gold IRA companies.[2]

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It’s also safer when you invest your money into gold IRA companies because no manipulations can be done, which is different from what you would expect from some other avenues of investing. Another thing to note is that your asset will not be taxed until you decide to withdraw.

For the year 2017, your traditional and Roth IRA contributions can’t exceed $5,500 ($6,500 if you’re 50 years of age or older). However, this limit doesn’t apply to rollover contributions.[3]

What about 401(K) accounts?

401(K) accounts can be opened through employers only. There’s a qualification requirement that needs to be fulfilled in order to be considered. Some employers may not offer this retirement plan, though and if yours doesn’t, you can always do a Roth IRA.

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Many employers tend to offer matching contribution when you open a 401(K). For example, if your employer would match your account contributions up to seven percent of your income, you should never contribute less than seven percent yourself. If you do contribute less than that, then you would be turning down some free money, which you wouldn’t want to do.

Which one would be my pick if I were to start now?

As someone who’s very cautious, I always ensure that anything I’m about to get involved in is safe, reliable, and beneficial to me. I don’t like to waste my money on things that don’t have any value.

In the case of 401(K) and IRA accounts, I’d go with IRA because it gives you more freedom while allowing you to also save more money from it. If you choose to invest in gold companies, that’s even better for you, as they’re more secured.

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To conclude

We all will want to retire one day, but unfortunately, some of us may have to work for some additional years, or even for a lifetime period. That’s why it’s very important that you start thinking about your retirement plans as early on in your life as you can.

You don’t want to be in your 70s and still have to wake up every morning to go punch in. Instead, you should be looking forward to traveling the world when you reach your retirement age. Take control of your future now and start planning for your retirement. You’ll be very happy when the day comes.

Featured photo credit: Dr. Larry Anderson via impowerage.com

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Published on June 12, 2018

How Much Money Do I Need to Retire? Find Your Answer Here

How Much Money Do I Need to Retire? Find Your Answer Here

It is never too early nor is it ever too late to start planning for retirement. It ultimately depends on your way of life, where are you living, and whether you need to let go of anything. A successful retirement strategy is to have enough pay to cover your expenses with a little cash going into a savings account for sudden financial needs.

With regards to retirement, we all have an alternate vision in mind. In fact, some think about traveling throughout the world, while some think of a peaceful life with their grandchildren. Whether we get ready for it or not, we will one day turn to retirement age and so, we should be prepared for it. I’m going to tell you how in this article.

Benefits of early ventures for retirement

The way this works is you figure out where you need to live, the amount it will cost you to live there (rent/food/transportation), and the various expenses you will need to account for, like travel/insurance/medical bills and taxes. Many people are struggling to put aside money for their future savings and some haven’t started yet. Think you can put off thinking about retirement? The reality is that you need to start thinking about it right now, and putting aside some money from today.

There are a lot of benefits of taking early steps towards retirement. Utilize the power of compounding, low investment for targeted corpus and you can create more corpus investing the same money:

  • If someone saves $100 every month and starts investing for 30 years at 10% return, initially you will see that within 5-10 years, your investments will not multiply. However, after that period, the corpus will increase immensely with the impact of compounding. The investment period expands the extent of profits increments in the corpus.
  • Suppose there are two people, one aged 30, and the other 40. Both need to resign at 60 with the same retirement objectives of $300,000 USD each. Both will put resources into an investment with 10% of the return. Thus, to accomplish their retirement objective, the younger one needs to save $100 USD / month and the older one needs to collect $300 USD / month. Since the older one has started investing ten years later than the younger one, he will pay more than double what the younger one will pay.
  • If someone saves $100 USD every month and starts investing at 30 years old till 60 and gets 10% annual return, his corpus becomes around $170,000. Otherwise, if he starts the same amount spending at 40 years of age with the same 10% return, he will have around $57,000 USD. He can profit by just investing ten years early.

You can’t invest too much money in retirement during the early stage of your career since you may have different objectives. However, you can increase the investment gradually if you start investing just a small amount.

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Average retirement age

For many people who are nearing retirement age or recently resigned, one of their most significant financial regrets is that they did not focus on saving for their golden years. As per the Consumer Reports study, it demonstrates that only 28% of investors with the age of 55 years or older are pleased with the way they have saved for retirement.

As per the report, The Economic Policy Institute breaks down how much Americans have put away.[1] Since you know that when the majority of people retire, you can subtract your age from that more significant number and check down what number of more years you need to work.

But many retirees go back to work. Some of them do part time job while others do seek for a second career. Some even come back to full-time work and then retire again in a couple of years. So deciding their retirement age could be tricky.

Average retirement savings

To get retirement started, saving is pretty easy, though it can seem complicated. These simple five steps will make you go on retirement now. So, you don’t need to stress over having the same regrets as today’s retirees.

1. Invest 15% for your retirement

Your initial step is to save 15% of your income. This will depend on your gross income and does not include any coordinating assets you get through your employer’s retirement plan.

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It’s sufficient to enable you to achieve your retirement investment funds objectives, but not too much to keep you from enjoying your income today.

2. Utilize tax-advantaged retirement plan

Yes, we utilized the T-word; however, don’t daydream! Split your 15% retirement contributing budget between charge conceded retirement plans like your 401(k) or after-tax plans like a Roth IRA.

3. Invest your money around

To put it all in one place is the most significant risk that you can take with your retirement money. With mutual funds, however, you can invest in the biggest and most recognizable brands as well as that new organizations you’ve never known about but has a lot of growth potential.

Opt a growth-stock mutual fund with background marked by solid returns for both your 401(k) and Roth IRA speculations.

4. Stay with it

Since mutual fund investing is less risky than investing in single stocks, it is not risk-free. You can see your savings grow in the long term as long as you can leave your money where it is and keep adding to it.

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5. Work with an investing professional

It is essential to look for an investment professional, as you must have a lot of queries concerning your retirement plan during 30 or more years of investing,

Never make due with an investment professional who recommends or patronizes you to turn over all your investment choices to them. Since this is your retirement, nobody will think or care about it more than you do!

You might analyze or compare your savings against the average retirement savings for your age group to check whether you’re falling behind or getting towards of the curve. On the other hand, it might be conceivable to hang up the work boots and hit the shoreline with fewer savings if you live easily or below your means.

How to achieve your financial goals?

An ideal approach to achieve your financial goals is to stay focused on what you need for your future, ignore everything (and everyone) else that may divert you. There’s a significant business culture out there that requires you to stay in debt, live for the occasion and stress over your future later on.

You need to start planning for your future from now, not when you have more time or money to invest. You can even talk to a financial advisor for any help. Cooperate to set your money goals and make an action plan to reach them. You can retire younger than you thought you could if you create a project and follow up on it.

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Start planning for your retirement

A lot has changed in the last 30 years; our previous generation had an career goal and they would join either a large private company or a government organization immediately after school or college. Then they would spend the next 38 years in the same organization and the form of provident fund and gratuity. They would retire with a decent corpus and they would later spend the remaining time with their pension benefits. It’s a bit different now, but with the above information, you’ll be well prepared.

Whether you can afford to retire now or not, you need not bother with a retirement calculator to get a rough estimate. You should have the capacity to closely approximate your daily spending habits to figure out how much money goes out the door every year.

Featured photo credit: Pexels via pexels.com

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