SavvySugar

What's the Difference Between an IRA and a 401k?

SavvySugar — Fri, 13 Mar 2009 09:30:40 -0700

One of the most common questions I get from readers is, "What's the difference between an IRA and 401(K)?"

If you're an athlete, 401(k) sounds like it should be the length of some torturous marathon. Of course, IRA might evoke images of the Irish Republican Army. I suggest you ignore your immediate word associations and begin thinking about your future immediately. Retirement as a goal really is like a long, slow marathon, and a well mapped out plan makes finishing on your feet a real possibility. I have graphed out the differences between IRAs and 401(k) accounts below. Here's to the long haul!

Name of plan	Purpose	Who can invest	IRS Contribution Limit for 2009	Taxes
401(k)	Tax-deferred retirement savings account offered by many employers.	If your employer offers it, you may be eligible. Check your employer’s plan for requirements.	$16,500 (plus up to $5,000 more if you are 50 or more). Your Employer’s Plan rules may also further limit your contributions.	Deferred until retirement; taxes paid when funds are withdrawn.
Roth 401(k)	After-tax retirement savings account.	If your employer offers it, you’re eligible. Check with your employer’s plan for requirements.	$16,500	Contributions are made with after tax dollars; qualifying withdrawals aren’t subject to income tax.

See the difference between a traditional IRA and a Roth IRA when you read more.

Name of plan	Purpose	Who can invest	IRS Contribution Limit for 2009	Taxes
Traditional IRA	Individual retirement savings account.	Anyone with earned income and under age 70.5 for the year in which the contribution is made	100% of earned income or $5000 ($6000 if you are over 50), whichever is less.	Contributions may be tax-deductible depending on several factors. Withdrawals of income and pretax contributions after age 59.5 are taxed as regular income.
Roth IRA	Individual retirement savings account.	Available to single-filers making an income up to $116,000 or married couples filing jointly making a combined maximum of $169,000 annually. If you are married filing separately, talk to your tax adviser for income limits	100% of earned income or $5,000 (or $6,000 if you are over age 50) whichever is less.	Contributions are made after taxes. Withdrawals of income aren’t subject to income tax if all conditions are met. For example, your withdrawal of income won’t be taxed if at least 5 years has passed since your first Roth contribution and you are at least 59.5 years old.

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Are You Still Contributing to Retirement Savings?

SavvySugar — Thu, 29 Jan 2009 07:15:58 -0800

It's not surprising that some people are tempted to pull the plug on retirement contributions when things are tight, but it's important to continue on the path to saving enough for the golden years. Have you kept up with your contributions as the economic crisis has worsened?

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5 Things to Accomplish Before 2009

SavvySugar — Wed, 10 Dec 2008 04:30:37 -0800

We are down to the wire of 2008, and now is the time when many of us procrastinate with the rationale that we'll be on top of our game in the New Year. There are a handful of money and job-related tasks that can't wait until the ball drops, so get on the ball now by accomplishing these five things before 2009. Start the slideshow to see what should be at the top of your to-do list.

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Savvy ATM: Revisiting the Retirement Account Rollover

SavvySugar — Mon, 10 Nov 2008 04:30:15 -0800

Job hunting might be the only thing on your mind after losing a job, but don't let your 401(k) from your previous employer slip through the cracks. Deal with wrapping up those loose ends before diving into the job search head first, otherwise you're more likely to indefinitely postpone the task.

Your 401(k) savings can be rolled into a Traditional IRA account without penalty. The bank that holds your IRA account will have paperwork for you to complete and will initiate the rollover. Your 401(k) will be liquidated and funds amounting to the account's market value at the time of liquidation will be transferred to your IRA account. From there, you'll need to rebuild your retirement account by choosing new investments. You could try and hold off until you've found another job and roll your retirement savings into your new employer-sponsored retirement plan, but there's no guarantee your new job will offer one.

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Definition: Hardship Withdrawal

SavvySugar — Wed, 24 Sep 2008 15:30:45 -0700

A hardship withdrawal is when a 401(k) account holder removes funds from her retirement savings because of circumstances like job loss, facing home foreclosure, or overwhelming medical expenses. While withdrawal is permitted during those tough times, the account holder cannot get away from the 10 percent tax penalty incurred when the funds are removed.

According to The Wall Street Journal, several 401(k) plan administrators reported a noticeable increase in hardship withdrawals this year compared to last. The shift signals that many 401(k) participants are more concerned about how they will pay their bills than saving for retirement. Administrators have also observed many employees dealing with the tough economy by reducing the amount they contribute to their retirement plans.

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Money Tip: Pay Your Bills on Pay Day

SavvySugar — Wed, 27 Aug 2008 08:00:36 -0700

When I was a fresh college graduate earning my first real paychecks, I quickly saw how living in a city like San Francisco isn't made for entry-level salaries. Exploring the city and all of its nighttime gems were certainly priorities, but the biggest priority was to keep myself out of debt while not depriving myself of enjoying my new surroundings.

I struck a balance by forming the valuable habit of paying all of my bills on pay day. That practice, coupled with automatic 401(k) savings and automatic transfers to a high-interest savings account, can allow for a relatively low-stress financial life. Once in a while we may make money mistakes that can throw us off track and unexpected expenses inevitably come up, but forming the habit of paying your bills as soon as you are paid will keep you out of serious trouble.

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Your Two Cents: Have You Started Saving For Retirement?

SavvySugar — Tue, 26 Aug 2008 14:00:10 -0700

There are a number of vehicles available to help us save for retirement. Maybe you're participating in your employer's 401(k) plan, you're saving in a separate IRA account, or you're using a combination of different accounts. Have you started saving for your golden years?

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Definition: 401(k) Debit Card

SavvySugar — Thu, 07 Aug 2008 15:30:03 -0700

A 401(k) debit card is deceivingly like the debit cards you're familiar with, except the money is drawn from your retirement savings and must be paid back to yourself with interest - essentially, it is a loan against your 401(k). You're responsible for making punctual payments, and if you miss one, you risk having to pay early withdrawal penalties.

While you'd be paying interest now, you'd really be borrowing from your future self. When you remove funds from your retirement savings it reduces the potential for compounding interest, therefore hurting your overall long-term savings goal and strategy. Do yourself a favor and pretend that 401(k) debit cards don't exist; you'll be grateful when you need to rely on those funds for living.

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Does Your Employer Match 401(k) Contributions?

SavvySugar — Wed, 23 Jul 2008 06:30:53 -0700

There are researchers out there who think the days of employers matching 401(k) contributions should be numbered. They argue that money would be better put to use by funding other employee benefits, and say employees would continue to participate in 401(k) plans even without the match.

The loss of this incentive wouldn't affect all workers, as there are plenty of companies that already do not offer an employer match. I'm wondering if you would be affected if this benefit were taken away - does your employer match contributions?

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Three Tips For Sticking to Your Retirement Savings

SavvySugar — Wed, 16 Jul 2008 08:02:04 -0700

Unless you're hooked up with a bullet and foolproof investment plan, chances are your retirement savings have taken a beating over the past many months. You're not alone! My 401(k) has been dragged through the trenches and the result is not pretty.

Am I a sucker for pumping monthly contributions into my retirement investments? I'd like to think not, though it's tough to contain my frustration when I peek at my account's worth. Find out what rationalization I use to make myself feel better when you read more.

Here are the little gems I use to tell myself in the end, it's all going to be OK. Hopefully they'll help you feel the same way about staying on track with your retirement savings.

I'm in this for the long haul. Retirement savings are for the future and aren't to be touched any sooner than your golden years. My investment plan reflects a long-term strategy and I trust that it will serve me well in the end.
I can't control the market. The market is a cycle and it's currently at a low point. While the account's total worth is lower than I've seen it before, I'm getting more shares for my money by buying them at their cheaper price. If history is any example, the cycle will come around and turn around this bear market.
I'm not alone! Staring at your dwindling account value might lead you to conclude that you have bad luck. If that were true, than most investors would be unlucky, too! There's no glass ball predicting the future, so acknowledge that the market is in a slump and move on.

One final tip: Don't check your retirement accounts often. I only check mine about once a quarter, because there's no point aside from fulfilling curiosity. It's always a good idea to make sure your investment plan meets your risk tolerance and time horizon, so review your accounts and see if they need to be rebalanced to meet your investment goals.

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