What Distinguishes 3 Popular Retirement Accounts
November 13, 2024
A quick synopsis.
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Financial security in retirement is a goal worth pursuing, but it’s one that a significant percentage of individuals feel is out of reach. According to a February 2024 report from the National Institute on Retirement Security, 55 percent of Americans are concerned they cannot achieve financial security in retirement.
Saving for retirement is an integral component of securing long-term financial security. There are many ways to save for retirement, and individual retirement accounts (IRAs) and employer-sponsored 401(k) plans are among the more popular ways investors build a nest egg for their golden years. IRAs and 401(k) plans differ in some notable ways, and recognition of what distinguishes these types of accounts can help people choose the right vehicle for them. When considering these vehicles, it’s important to point out that contribution limits can change from year to year, so individuals can expect to increase their contributions in future years if they hope to maximize the allowable amounts. The following breakdown, courtesy of US Bank®, notes some key differences between a traditional IRA, a Roth IRA and a 401(k).
Traditional IRA
Eligibility: Anyone with earned income is eligible to open a traditional IRA.
Funding: A traditional IRA can be funded with after-tax dollars or as tax-deductible contributions.
Contribution limits: $7,000 annual limit in 2024, though individuals age 50 or older can contribute an additional $1,000 if they choose to do so.
Employer match: None.
Investment selection: Account holders can choose their own investments.
Roth IRA
Eligibility: Individuals aspiring to open a Roth IRA are urged to speak with a financial planner or accountant, as certain contribution criteria and tax filing requirements must be fulfilled.
Funding: A Roth IRA is funded with after-tax dollars.
Contribution limits: $7,000 annual limit in 2024, though individuals age 50 or older can contribute an additional $1,000 if they choose to do so.
Employer match: None.
Investment selection: Account holders can choose their own investments.
401(k)
Eligibility: Individuals are urged to speak with human resources professionals at their place of employment, as US Banks notes most employers have certain qualifications their workers must meet in order for them to participate in these plans. Those qualifications can vary between firms.
Funding: A 401(k) is funded with pre-tax dollars deducted directly from participants’ paychecks.
Contribution limits: The annual limit for 2024 is $23,000, though participants age 50 and older can contribute an additional $7,500.
Employer match: Some employers match employee contributions up to a certain percentage. Investopedia notes the average match was 4.5 percent in 2023.
Investment selection: Various portfolios may be offered, but those available are generally chosen by employers.
Individuals aspiring to create financial security in retirement are urged to consider investing via a 401(k) or a traditional or Roth IRA.
Please keep in mind this information should not be considered as financial advice. Investment decisions should be based on individual research and consultation with a qualified financial professional. The value of investments can fluctuate, and past performance is not indicative of future results. Always consider your risk tolerance and financial goals before making investment decisions.
