Is a Traditional IRA Better Than a 401(k)?
Unless your employer offers a matching 401(k), an IRA may provide more investment options and flexibility.
Anyone with earned income can contribute to a traditional IRA, though certain income limits prevent certain deductions. Before investing, it’s wise to consult a tax professional.
Tax-deferred growth
Traditional IRAs provide anyone with an easy, tax-advantaged way to save and invest for retirement, either on their own or through their employer, with access to various investment strategies and tax advantages. Furthermore, you may even rollover funds from qualified workplace retirement plans or other IRAs into it.
As with 401(k) contributions, IRA contributions reduce taxable income and can help you to accumulate more wealth over time. But unlike their employer-managed counterparts, IRAs provide greater freedom and choice when it comes to how you choose to manage your money.
However, withdrawals from an IRA require tax payment and may even incur a 10% penalty if taken out before age 59 and a half unless certain exceptions apply. This penalty acts as an effective incentive to stay invested until retirement when your tax bracket may be lower.
Tax-free withdrawals
Traditional IRAs allow tax-free investment growth regardless of whether or not you itemize deductions on their income taxes, making this an especially helpful benefit for workers with employers without retirement plans or too high an income threshold to contribute pre-tax to workplace savings accounts.
Under certain conditions, you can access your IRA funds penalty-free to cover eligible medical expenses that exceed 10% of your adjusted gross income or purchase your first home (although taxes will apply upon distribution).
IRA withdrawals may be made without incurring penalties if they comply with specific rules and limitations, such as not using it within six months. Beneficiaries of inherited IRAs must pay taxes on distributions made, which may deter investors. A trusted tax professional can help determine any potential costs in case of emergency withdrawals.
Access to investment options
If you are eligible, an Individual Retirement Account (IRA) provides many investment choices to meet your investing goals and level of risk tolerance. Options might include stocks (also called equities), bonds or mutual funds.
No matter which option you select, your account should provide similar tax benefits as a 401(k). Your contributions may be tax deductible and withdrawals won’t become taxable until age 59 1/2.
Traditional IRAs can be opened at many brokerages or through robo-advisors, allowing you to save at the frequency and dollar amounts that work for your budget. Once you reach age 73 or 75, minimum distributions from your account must begin by April 1 of that year (unless an exception applies ). These mandatory distributions keep compounding working harder in your favor!
More flexibility
Traditional IRAs provide more flexible investment options than 401(k)s, enabling investors to choose among stocks, bonds, and mutual funds – not to mention working with brokers and online platforms to manage them – plus you have the option of opting for an automated advisor who will recommend investments based on your goals and investing horizon.
Traditional IRAs provide flexible saving solutions for anyone wanting to put away more than their workplace plan allows for. Furthermore, this retirement savings account will likely help those in lower tax brackets when retirement arrives as withdrawals will only be taxed at their income tax rate upon withdrawal.
However, Traditional IRAs come with certain restrictions. For instance, those withdrawing money before reaching age 59 1/2 may incur an early withdrawal penalty and mandatory withdrawals must start after age 72.
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