401k vs IRA: What is the advantage of a 401k over an IRA?

401k vs IRA: What is the advantage of a 401k over an IRA?

With the ongoing economic crisis in the USA, workers are becoming increasingly concerned about just how much their 401k plans will be worth once the COVID-19 crisis is paid for, and some are being encouraged to consider an alternative method of retirement planning, an IRA.

401k plans are the traditional method of an employer-sponsored retirement plan, however when people switch jobs they usually elect to rollover any accounts to their new employer, rather than withdrawing the money at that time.

What are the pros and cons of an IRA?

An IRA plan allows you to consolidate all your different retirement accounts into one IRA, which makes your life an awful lot easier from an organisational perspective. The process is very simplistic and there are no added taxes or penalties for moving your retirement plans around. An IRA also offers wider investment choices once your money is settled within it, and the costs are lower than with a 401k.

However, there are risks regarding creditor protection, as well as minimum distribution requirements being present.

With an IRA you have to be four years older to withdraw funds, and avoid a 10 percent early withdrawal penalty, than if you wish to do so with the traditional 401k plan.

What are the pros and cons of a 401k plan?

A 401k is generally considered safer, merely because it is a more-established long-term retirement planning strategy.

It allows your employer to directly pay into the account and these payments are easy to keep track of and check.

You generally only have to wait until you’re 55 years old to withdraw from your 401k and not receiver an early withdrawal penalty.

Whereas, the fees are much lower as compared to an IRA, because you have access to lower cost institutional investment funds because of group buying power.

If your 401k is invested into company stock, you may be eligible for favourable tax payments on withdrawals.

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