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IRA Plan : IRA for Dummies | IRA vs. 401k

IRA Plan definition

IRA stands for, individual retirement account. It is an investment tool used to set aside funds for retirement saving. The IRA consists of different financial services like stocks, bonds, mutual funds, etc. Roth IRA, traditional IRA, simple IRA and SEP IRA are all types of IRA. The traditional & Roth IRA are for individual taxpayers while the simple & SEP IRA are for small business owners and the self-employed. Just like the 401k plan, the IRA has its rules on how much you can contribute each year to the account and when you can withdraw.

Roth IRA vs. traditional IRA Plan

If you are contemplating on which IRA type to choose from between Roth IRA and the traditional IRA, Here’s a breakdown of the major difference between the two;

  1. Income limits: basically, your income is the major factor that determines which option is best for you. Your income determines your eligibility to contribute. If you earn a certain high amount, you may not be allowed to contribute to a Roth IRA. And also your contribution limits may be reduced if your income falls short of a certain amount, for example, the right to contribute to a Roth IRA is phased out for those with adjusted gross income of $118,000 for single taxpayers and $186,000 for married couples filing jointly. This limitations, of course, is for 2017 and can be adjusted anytime. When contributing to a traditional IRA, you get no income limitations.
  2. Tax-deductible: your eligibility to deduct on your taxes is also a major factor in deciding between a traditional IRA and Roth IRA. If you are eligible for tax deduction, then it means you will get a tax break for the year you contribute to a traditional IRA. See here for the requirements you must meet to be eligible for deduction.
IRA Plan

Note that your contributions to Roth IRA are not deductible.

  • Withdrawals: another critical factor to consider is when your savings for both IRA types can be withdrawn. The traditional IRA makes it mandatory for you to start making some withdrawals at 701/2 years notwithstanding if you need the money or not. On the other hand, the Roth IRA doesn’t necessitate you to make any withdrawals. So if you have other income sources, you can as well let your Roth IRA grow tax – free throughout your lifetime. Also at age 591/2, you are allowed penalty-free withdrawals.

IRA vs. 401k

Before we check out the difference between both retirement savings plan, note that you can have both plans so you might not need to choose between them you just need to know how each operates. The major difference between the two is that the employer offers the 401k plan, but IRA is like the name implies an individual retirement account which you can personally operate. Basically, anybody who earns above $70,000 for singles and $118,000 for married couples filing jointly and is below 701/2 years can contribute to an IRA. You also need to check out how you can match your employer’s contribution to your 401k plan.

Click here to see other differences between the two retirement plans.

In conclusion, IRA is a great retirement savings plan for everybody who wants a secure future after retirement. Your money grows tax – free and you can escape taxes either through the money you put in or while withdrawing depending on the IRA option you choose.

Hope this article was helpful in giving you a brief insight into IRA if you found this article useful please share amongst your friends and any feedback would be appreciated.

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