Both 401(k)s and IRAs share valuable tax benefits, such as tax-deferred retirement savings, yet they differ in key aspects that could impact your investment choice.
When planning for retirement, one of the most important decisions you’ll face is where to allocate your savings to maximize your benefits. Both 401(k) plans and Individual Retirement Accounts (IRAs) offer tax-deferred savings for retirement, but they differ in several ways that might affect your decision on where to put your money. Understanding these differences will help you make an informed decision that aligns with your financial goals and retirement plans.
Required Minimum Distributions
Required Minimum Distributions or RMD is the IRS-mandated amount of money you must withdraw from traditional IRAs or employer-sponsored 401(k)s each year. The purpose of an RMD is to make sure individuals start utilizing the savings accumulated in these accounts, which have been growing tax deferred. The age where RMDs are required varies based on when you were born. If you turn 73 before 2033, the RMD age will be 73. However, if you turn 74 in 2033 or later, you won’t need to start taking RMDs until you’re 75.
Those with multiple 401(k)s will 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. If RMDs are not taken, there can be significant penalties, which could amount to 50% of the amount that should have been withdrawn.
Accessing Funds Early
While you don’t want to use your retirement accounts for other purposes, if the unexpected happens, you may be able to withdraw money from your IRA. Doing so may require you to pay both income tax and an early withdrawal penalty, but 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.
Using Funds 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.
Charitable Contributions
Those aged 70½ or older may contribute up to $100,000 directly from an IRA to a charity, which can reduce taxable income. This becomes advantageous once RMDs kick in, as the charitable distribution can satisfy some or all the RMD amount, potentially offering a tax benefit.
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. We’re here to help you figure out the best option for your situation and answer any questions you may have.
Michelle Lee
mlee@firstent.org
323-845-4434
First Entertainment Credit Union
Disclosures
- *
-
To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Past performance is no guarantee of future results. Securities offered through Osaic. Member FINRA/SIPC. Insurance products offered through Osaic or its licensed affiliates. Not NCUA Insured. No Credit Union Guarantee. May Lose Value. First Entertainment Credit Union and First Entertainment Investment Services are not registered brokers/dealers and are not affiliated with Osaic. Osaic advisors do not offer tax advice. Please consult a tax professional.
