retirement planning 401k & iras MultiGen Wealth Services

Retirement planning is key; there are several types of defined contribution retirement plans on the market. Among these are the popular 401K and IRAs. A 401K is an employer-sponsored plan that deducts pre-tax money from your payroll check and may include a matching contribution from your employer. An IRA is an Individual Retirement Account that functions as a tax favorable basket for personal retirement savings and investments. These two retirement planning accounts each offer their own advantages when saving for retirement but they differ in several ways.

Retirement Planning

401K Retirement Plans Named after the Internal Revenue Code that established it, a 401K allows you to make tax deductible contributions from your monthly payroll check. Your employer may match your contributions, although he/she has no obligation to do so. Employer contributions may also be in the form of company stock. A third party, usually an insurance company, stock brokerage or a mutual fund, will then invest the contributions.  A 401K has several benefits including:

  • Deductions are pre-tax, increasing your tax savings.
  • There are no tax on earnings in your 401K, allowing for faster growth potential.
  • You can benefit from employer contributions, effectively increasing your overall contribution.
  • Deductions come from your payroll, which ensures consistent contributions.
  • You may borrow from your 401K in case of financial difficulties or for a down payment on a home.
  • There are certain penalty fee waivers in case of disability, or for payment of a mortgage or college fees.

Restrictions of the 401K Retirement planning through a 401K comes with certain restrictions. These are:

  • Contribution limits for both you and your employer of up to about $45,000 annually.
  • Penalties and taxes levied on unqualified withdrawals before the age of 59.5 years.
  • Interest charged on borrowed funds, on the pain of penalties and taxes.
  • Vesting provisions that restrict ownership of employer contributions during the first six years.

A 401K works best when you contribute as much as possible and qualify for employer contributions. You should choose your funds wisely and divest your employer’s company stock contributions to mitigate risk. IRA These are accounts that you open on your own, for tax efficient ways of investing in stocks, bonds, mutual funds, and other assets. This allows compounding of dividend earnings, interest, and capital gains for faster growth potential. IRAs come in different forms, and are restricted to certain groups of people. These are:

  • Traditional IRA: These can be either tax deductible or non-deductible, depending on your income level and access to a 401K. You pay taxes only when making withdrawals.
  • Roth IRA: This type of IRA allows you to contribute from income after tax. Withdrawals are tax-exempt.
  • SEP IRA: This is a Simplified Employee Pension plan, available to business owners with one or more employees Contributions are tax deductible and made by the employer in the employee’s name. Employees do not contribute. SEP IRAs enjoy a higher contribution limit than traditional or Roth IRAs.
  • SIMPLE IRA: This is the Savings Incentive Match Plan for Employees. It is open to small business owners and self-employed people. The employee can contribute into the plan, which the employer has to match up to 3% of salary.

As with any retirement planning goal, it is important to start as early as possible in order to reap the potential gains of compounded growth. You may use both the 401K and IRA to complement other savings and investment plans.

MultiGen Wealth Services can help guide you with your own personal plan to secure your financial plan.  Just send us a message!

* The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

*Withdrawals from a Roth IRA account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Unqualified withdrawals from 401(k), IRA and Roth IRA accounts prior to age 59 ½ may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of investing in 401(k), IRA and Roth IRA accounts.”