Both 401(k)s and IRAs share valuable tax benefits, such as tax-deferred retirement savings. The 401(k) is a retirement benefit offered by employers, while individuals open an IRA at a financial institution. Both are excellent vehicles to save for retirement, and if you can invest in both, that would be ideal. However, IRAs offer some benefits you won’t find with a 401(k). The investment experts at First Entertainment share this important information about these IRA benefits.
More Investment Options
When you open an IRA, your investment choices are practically limitless, with the exception of some prohibited investments, such as life insurance or collectibles. With a 401(k), your employer will typically limit the number of investment options available through the plan. Additionally, you need to look at the fees associated with the plan.
Combined Required Minimum Distributions (RMDs)
An RMD is an IRS-mandated amount of money you must withdraw from traditional IRAs or employer-sponsored 401(k)s each year. Beginning in 2023, you will need to take RMDs when you turn 73, and the age requirement will increase to 75 in 2033. If you have multiple 401(k)s, you’ll need to take RMDs from each 401(k). If you have multiple IRAs, you can combine the RMDs and take them from any single IRA account.
Take Early Distributions
While you don’t want to use your retirement accounts for other purposes, if the unexpected happens, you can withdraw money from an IRA, even if you have to pay income tax and an early withdrawal penalty. This option is guaranteed under the law. Your option to withdraw money from a 401(k) will depend on your employer's rules for the plan.
Funds Can Be Used for Qualified Expenses
With an IRA, there are legal exceptions for withdrawing funds without incurring a penalty, including using funds for higher education expenses, paying medical premiums in the event of job loss, or using up to $10,000 toward a first home purchase. The 401(k) does not have this option.
Make Qualified Charitable Distributions (QCDs)
If you are 70 ½ or older, you may contribute up to $100,000 directly from your IRA account to a charity. Because the QCD is not counted as income, it will lower your tax bill. Once you turn 73 and must take RMDs, you can take a distribution and make a separate donation to reduce your tax bill further. Plus, the QCD can offset part or all of your RMD.
Let First Entertainment Credit Union Help With Your Retirement
If you have retirement funds sitting elsewhere and need help deciding whether to roll a 401(k) into an IRA or to consolidate retirement accounts, give us a call to discuss the best option for you. We’re more than happy to answer all of your questions!
Michelle Lee
mlee@firstent.org
323-845-4434
First Entertainment Credit Union