Frequently Asked Questions
What is an IRA?
IRAs are retirement savings plans that offer tax incentives to individuals. Unlike a 401(k) plan, they are not setup by employers, giving individuals more flexibility and control over how their funds are managed. However, there are several different types of IRAs and it’s important to understand the rules and eligibility requirements to decide which plan is right for you.
IRA vs 401k
What is an IRA?
An IRA is an individual retirement arrangement where individuals receive tax benefits for contributing, depending on the type of plan selected. All IRAs typically have restrictions on when you may contribute, how much you may contribute, and how distributions are made. The most common types are Traditional IRAs and Roth IRAs, but you can also use a SEP IRA, a Self-Directed IRA, or a SIMPLE IRA.
What is a 401(k)?
A 401(k) is an employer-sponsored tax-deferred retirement account. Both employees and employers may contribute to the plan. Most people select either a Traditional 401(k) or a Roth 401(k), depending on what’s made available by their employer. Like the IRA counterparts, the key difference between these two plans is in how contributions and withdrawals are taxed.
Why consider a Rollover IRA?
If your IRA account isn’t working out the way you hoped, you may consider moving your retirement savings to another account. Maybe the custodian you currently use charges higher fees than you’d like or maybe they provide limited investments choices. Either way, you may decide another investment manager is a better option for your situation and need to move your savings.
In addition funds may also be rolled over from an employer-sponsored retirement plan, such as a 401(k). While some employers allow you to keep your retirement savings in the company plan after you switch jobs, you may lose flexibility in terms of how that money is invested. Rolling the money over lets you keep your savings tax-deferred while potentially giving you more control over your retirement assets.
How does a 401k work?
401(k) plans are retirement savings plans named after the portion of the IRS tax code that created them, and they are exclusively designed to help businesses support their employees in saving for retirement. While employers have some flexibility in how their company 401(k) plans are administered, the basic rules are the same. Participating in your company’s 401(k) is an easy way to save for retirement. In many cases, company also offer matching contributions, which ends up being a boost to your total compensation.
What is a Roth IRA?
The most important thing to know about the Roth IRA is that, unlike Traditional plans, your contributions are taxed up-front. This has an important benefit. In an emergency, you can withdraw your contributions to cover unexpected expenses without taxes or penalties. Funds in your Roth IRA grow tax-free, and when you take qualified distributions, you are not responsible for any additional taxes.
There are immediate benefits to making Roth IRA contributions as well. For example, your contribution might qualify for the Retirement Savings Contributions Credit (Saver’s Credit), which reduces tax liability for low- and moderate-income workers.
You can continue to contribute to your Roth IRA indefinitely, and there is currently no age at which you must take mandatory distributions. As a result, your savings can continue to grow indefinitely.