IRAs, Roth IRAs and 401(k) plans

What are the differences between an IRA, Roth IRA and a 401(k) account?

IRAs, or Individual Retirement Accounts allow an individual to allocate and invest a portion of their pre-tax income into retirement savings.  Investible assets may include: stocks, bonds, mutual funds and other traditional funds. These funds are not to be drawn from until the person reaches retirement age and payment drawdowns are taxed as current income received.

Roth IRAs differ most greatly from Traditional IRAs in that investments into a Roth account are made from income which has already been taxed. Therefore, once an individual retires the income payments received are tax-free. However, there limits to who can invest in IRAs and Roths based on both annual income and contribution amount. Annual contributions cannot exceed $5,000 and this portion of yearly earnings is not taxable. There other allowances and restrictions on these accounts based on income source and amounts as well. For example, tax-free IRA retirement accounts are only permissible if your employer does not offer a 401(k) savings plan.

401(k) are employer-based retirement programs that allow employees to allocate a portion of their regular income into a savings plan. Many employers will also “match”, up to a specified percentage, their employee savings as a compensation benefit. Like IRAs, 401(k) savings plans are subject to income taxes upon distribution at retirement. They enable employers to offer stable, flexible options for their employees to participate in their own retirement planning, investments and execution.



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