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	Deferred until retirement; taxes paid when funds are withdrawn.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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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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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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Women Need to Save More to Support Their Longer Lives

SavvySugar — Thu, 10 Jul 2008 08:03:39 -0700

It may seem counterintuitive that you're presented with retirement savings options the moment you get your first job. You just started working and you're asked to consider your life when you've stopped working for good. That's reality folks, because unless you have a family fortune to count on or make serious dinero that lets you worry less, it can take your working lifetime to save enough to live during retirement.

A new study released by human resources consulting firm Hewitt Associates determined that women aren't saving enough to support them through their longer lives. Women tend to start saving later than men and are in retirement an average of three more years. Learn more about the study and how to make up for lost time when you read more.

The study surveyed projected retirement levels of about 2 million workers and used actual employee balances. Here are the key conclusions from their findings.

25 percent of women didn't contribute enough to take advantage of the company match.
Not including an employer's matching contribution, a woman who earns $57,000 a year can save an extra $81,000 by the time she retires if she boosts her contribution from 2 percent to 4 percent (an extra $95 a month).
90 percent of women were unsure about managing their finances.
Men and women are on track to save about 67 percent of what they'll actually need for retirement, and Hewitt estimates workers will need to replace 126 percent of their salary after retirement.

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Ask Savvy: What Should I Consider When Opening a Brokerage Account?

SavvySugar — Wed, 23 Apr 2008 09:55:22 -0700

SweetPeasMom asked this important question in my Ask Savvy group - have you joined yet?

My husband and I are starting to look at investment and retirement accounts. Right now, we've decided on a Traditional IRA. Does it make a difference where we get an IRA? If so, what do we want to look for in choosing the bank/credit union/etc?

To see my answer just read more

It's great that you and your husband are beginning to set aside money for your future, and I know it can be daunting sorting through the various companies capable of holding your brokerage accounts. The two biggest questions you need to ask yourself are how much are you willing to pay in fees, and how much customer service do you want or need? Also, make sure that any company you choose is a member of the Securities Investor Protection Corporation (SIPC) so that your money is protected if the company goes under.

Fees are extremely important because of the impact they have on the overall growth of your account. Retirement accounts are all about long-term growth and you want to avoid stunting it with expensive commission fees, trading fees, and account maintenance fees. There are often other potential charges like inactivity fees, so shop around and make sure you gather all of the information you can - you could even create a quick and easy spreadsheet with all of the details in order to keep it all straight.

You need to determine which of these types of brokerage companies best suits your needs: full service broker, discount broker, or online broker. Full service brokers are more expensive because you're paying an expert a commission to answer your questions, help with your portfolio allocation, and execute trades for you. If you don't need this kind of guidance or expect this type of customer service, then you can surpass the full service brokerage for one that's less expensive.

Discount brokers execute trades at a discounted commission because they don't offer advice on your investments. Online brokers allow you to steer your account by entering trades yourself and managing your account online - you won't get any investment advice, but most have in-depth research tools and you'll pay a discounted trading fee.

Do all of your research and talk to family and friends to see if they use a company they'd recommend. Between their suggestions and the list you've come up with, you'll have plenty of details to compare and find the best one for your needs.

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Retirement Account Focus Review

SavvySugar — Fri, 21 Mar 2008 12:53:12 -0700

Over the past several weeks we've discussed different retirement options and choosing the right plan for you. We've also looked into selecting investments for your account, how much you should save for the future, and important decisions you might face when you have a retirement account. Since saving for retirement is one of the most savvy things you can do, in case you missed any of them I've rounded up all of the retirement tips. Soon you'll be polishing your plump nest egg! To see all of my tips just read more.

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Retirement Account Focus, Part VII

SavvySugar — Thu, 13 Mar 2008 04:04:11 -0700

We've been reviewing methods for retirement savings that are focused on those who are currently working, but if you're a stay-at-home spouse that doesn't mean your side of retirement savings should be brushed to the wayside. Individual Retirement Accounts (IRAs) typically require that you earn income from work in order to have this type of account, but if you're married and your spouse is working there's a way to save in your name. To find out how just read more

You must file joint tax returns to qualify for a spouse-funded retirement account. If your household adjusted gross income is between $159,000 and $169,000 in 2008 or between $156,000 and $166,000 in 2007 (you still have a month to fund the account and call it a 2007 contribution!) your spouse can open a Roth IRA in your name. The maximum contribution for 2007 is $4000 and it's been raised to $5000 in 2008, but if your income is above the smaller number of the aforementioned income brackets you're eligible to make only a partial contribution.

So far we've only talked about the Roth IRA, but what about a traditional IRA account for a non-working spouse? Well, it's an option but a much more complicated one. Traditional IRA contributions are typically tax deductible, but the deductibility capacity of a spousal-IRA is dependent on whether your spouse is covered by a retirement plan at work.

Before making a decision about which IRA is the best choice for you, try running some numbers through an online calculator and you may want to talk to a professional if you're still not sure. It's certainly worth the effort - you and your husband can greatly increase your overall retirement savings by funding an additional IRA.

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Play Hard to Get With Your Money

SavvySugar — Tue, 04 Mar 2008 08:27:11 -0800

This credit crisis we're in must have been on the minds of neuroscientists who recently completed a study on why it's so tough to not be lured by the spell of instant gratification. Researchers found that we don't seem to be cut out for the waiting game when it comes to cash - the possibility of receiving a slightly bigger reward tomorrow doesn't arouse the brain as much as a smaller gain today.

When offered a payout today of $20, the studies discovered that the average person's brain will justify waiting three weeks for a higher reward only if that amount grew at an annualized rate of about 4,800 percent. They attribute this rationale to our hunter-gatherer days when food wasn't always available, and the size of a future feast would have to justify choosing it over eating now.

Playing hard to get with your money is the best way to protect yourself against your urges prompted by the desire for instant gratification. Set up automatic transfers from your checking account to your savings account so you're not tempted to spend, and set up automatic deductions from your paycheck to deposit money in to your retirement savings account.

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Retirement Account Focus, Part III

SavvySugar — Thu, 14 Feb 2008 13:52:18 -0800

Many of you have been asking about whether or not now is a good time to invest because the market hasn't exactly been steady. It's understandable that you're protective of your hard-earned money and don't want to see your account dip because of a down market, but that's not what you should focus on when thinking about your retirement investments especially. I have an opinion of market timing that not everyone shares, but it's one that has worked for some serious professional investors. To see what it is just read more

Timing the market is one way that people get their emotions mixed up with their investments, and emotional investing is risky in itself. Rash decisions can be made when you're trying to protect not only your nest egg but your ego.

Because you're investing for the long term, your account is going to have time to ride out the market cycle - which you can't control. In fact, at the Berkshire Hathaway Annual Meeting With Shareholders on May 1, 2005, Warren Buffet admitted that he and the vice president of the company agree on their market sense: "We spend no time talking about what the stock market is going to do, because we don't know."

So, moral of the story? Don't try and time the market because there's just no point. Maybe it is time for you to look into a Roth IRA.

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