By: Ashley Hurtz
What is a 401 K?
401 (K) is a retirement plan to use to put away money now to use when you retire. There are many different types to retirement plans and some are very similar. 401 (K)'s are very similar to a traditional IRA but it also has some differences that help make 401(k)s better than a traditional IRA.
Similaries between a 401 K and a traditional IRA
There are many things that are simlar between a 401 K and a traditional IRA, in which they are esentially the same plan. In any retirement account you are defering taxes and putting pre-tax money into your account. This money can grow in your account without you having to pay taxes on it. At the age of 59.5 is when you are allowed to start withdrawing or distributing from that account. If you withdraw before that you will be taxed on your withdrawal and also recieve a penalty on your funds. But by the age of 70.5 you have to start withdrawing from your account otherwise you wil recieve a penalty also. A traditional IRA and a 401 K are not totally exempt from taxes. By using these accounts you are just pushing back the date in which you are going to pay income tax on the money you put into the account.
Differences between a 401K and a traditional IRA
Even though the 401 K has many similarities to the traditional IRA it also has a few qualities that set them apart and above a traditional IRA. A 401 K actually has a significant higher limit put on the account than a traditional IRA does. In 2010 the limit on 401k's was $16,500 and the limit on a traditional IRA was $5,000. 401K's are often orgainized by your employer which specifies where you can invest your money into and acually runs the account for you. Also with a 401 K your employer might match every dollar you put into the account or double it. The money going into your 401K account is taken out before pay checks and the tax deductions. You are also able to borrow from a 401 K but you have to pay interest on the money borrowed. One thing that can make a traditional IRA more sutable than a 401 K is that with a traditional IRA you are able to invest your money wherever you want to givng you flexibilty you wouldn't have with a 401 K.