401k vs IRA

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Day 15: HERE: Finding Your Why

 

Week 3: Maintaining Your Net Worth

Today’s Easy Financial Task: Learn about retirement accounts and sign up for an IRA account.

How to rock this task:

  • Learn the difference between a 401(k) and IRA
  • Request 401(k) information from your employer
  • Open an IRA account  

 

Welcome to Day 16 of the LRC: Net Worth Edition!

We’re close to the end of this week, but there are still a few awesome tasks to get through that will help you grow your net worth!

Today, we’re going to take a dive into two basic investment accounts — the 401(k) and IRA.

Let’s dig in shall we?

 

What’s a 401(k)?

A 401(k) is a company-sponsored retirement plan.

Companies who offer a 401(k) benefit let you devote a portion of your income from each of your paychecks to the retirement plan. They may also match your contributions to a certain percentage.

You’ll often hear financial planners say you should “max out” your employer contributions. This means that you should contribute at least enough of your income each pay period to get the full match from your employer. IT’S FREE MONEY!

When signing up for the 401(k) program, you’re able to choose the strategy in which you want to invest your money (stocks, bonds, etc.)

 

What about taxes?

The money you contribute to your 401(k) is tax-deferred.

Tax deferral means that your income pretax goes into your 401(k) account. You pay tax on this income later on when you withdraw it at retirement.

The good thing about pretax contributions into your 401(k) account is that it reduces your taxable income for the year.

Woot, woot for a tax break!

 

Now… here’s the very best part *drum roll*:

Saving money in your 401(k) happens automatically. You tell your employer how much you want to contribute and grow your dough each paycheck without thinking about it.

 

Can I withdraw money early?

You will get hit with early withdrawal fees if you take money out of your 401(k) early.

I drained my 401(k) when I was in a financial pinch and it was a move I regret. I had to start saving for retirement again from square one and lost a significant amount of the savings I worked hard for because of the fees and taxes.

There are very few (if any) circumstances where you should take money out of your 401(k). Your goal should be to keep money in the account and let it build until you retire.

 

401(k) Contribution Maximums

The most that you can contribute into a 401(k) for 2018 is $18,500.

If you surpass this limit, you may have to pay tax penalties so be careful.

If you can contribute more than this amount for retirement (or your company doesn’t offer a 401(k) plan at all), you can consider opening an IRA account!

We’ll talk about an IRA next, but first:

Do This Task: If your company offers a 401(k) plan and you’re not yet participating in it, request a 401K information packet from your Human Resources department today!

 

What’s an IRA?

An IRA is another type of investment account that anyone can open that has the income to save for retirement. It doesn’t have to be associated with your employer.

You can open up an IRA account at many financial institutions. Ally Bank is one of my favorites! You can sign up for them here!

The two most common types of IRAs are the Roth IRA and the Traditional IRA.

Here’s what you need to know about both:

 

Roth IRA – A savings account where you deposit already taxed income. Basically, you get paid by your employer and then you transfer some of the cash into the Roth IRA. In this situation, the money you withdraw at retirement is tax-free because you’ve already paid income tax on the money.

 

Traditional IRA – A savings account where you get a tax deduction for the contributions you make each year. Like the 401K account, you then pay taxes on this money when you withdraw it in retirement.

 

How do you invest money in an IRA?

There are two approaches you can take with your IRA account.

You can invest the money you transfer into your IRA account manually by selecting individual stocks, etc. Or you can sign up with a robo-advisor that will invest money on your behalf after you choose a risk tolerance you select.

Want to learn how to invest in stock and other in-depth information about investing? We have courses to help you with this in the Live Richer Academy!

 

Can I withdraw money early?

Like the 401(k), you will have to pay fees if you withdraw money from your IRA early. Again, think of this money as untouchable money that you will only be using in retirement.

 

IRA Contribution Maximums

The most that you can contribute to an IRA for 2018 is $5,500.

If you surpass this limit, you may have to pay tax penalties so be careful.

 

Do This Task: If your company doesn’t offer an IRA, sign up for an IRA with my favorite online bank — Ally! 

Get started contributing to an IRA with Ally Bank HERE.

 

That’s it! Make sure to check in with your accountability partner!

 

I learned the difference between a 401(k) account and IRA account! Day 16: #LiveRicherChallenge… Click To Tweet

 

Live richer,

Tiffany

 

You can reach out to me here:

Twitter: @thebudgetnista

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P.S. Don’t forget to get your free Live Richer Challenge: Net Worth Edition Starter Kit. GET IT HERE.

P.P.S. Here’s a copy of the Challenge Calendar. It’s a fun way to keep track of your progress.

LRC Net Worth Calendar

Want to work through the Live Richer Challenge: Net Worth Edition in a workbook? It’s part of a bestselling series!

Click the link below and get your copy.


My Lisa Rule: I have 4 sisters and Lisa is the baby (well she’s not a baby anymore). Of all of my sisters, I’m the most protective of her. Before I share any product or service with you, it must pass my Lisa Rule.

What’s the Lisa Rule? If I would not advise Lisa to use a product or service, I won’t advise you to. YOU are my Lisas. I feel protective of you and your financial journey.

Ally Bank passes my Lisa Rule. Yes, I am an affiliate of Ally Bank, and I earn a commission off of referrals, but I would not recommend a product or service that I didn’t believe was helpful and useful.

  • Char Bee

    I have a Roth IRA which I try to max out yearly, I’ll be working overtime to get it maxed out this year (and also with bonuses). I am poised to max out my 401k (TSP) and also an HSA (Health Savings Account) this year. My budget is super tight due to this!!! Squeezing out those contributions to invest in my future! lol.

    • Yes! Your future you thanks you @@disqus_YASf2GtWAS:disqus .:)

  • Lisa

    I also have a Roth IRA. I decided to get on my second yr. working through a local credit union. I was so short on cash at the time but it was worth it to start. I too have 401b though my employer. I must admit 15yrs in job just so glad I started early.

  • Jamie Cheatwood

    I have been contributing to my companies 401K until I discovered that they match at their discretion and it’s only a percentage depending on how long you’ve been there. Last year I put in over $2,000 and they put in $37…. So I have stopped my direct deposit into the 401K and I will be putting it into the Roth IRA I just opened. I just started the stock intensive in the academy (which I’m super excited about!), so I’m looking forward to watching that account grow!

    • Yes! Welcome to the Academy. That’s one of my FAVORITE courses. You’re going to love it @@jamiecheatwood:disqus

  • Lee Hernandez

    I have a 403b plan (target fund 2040) from my previous employer and it’s sitting in Fidelity acct. I have not made any contributions since I left my job a year ago. Since my current job does not offer 401k, I was advised to roll it over to a Traditional IRA and while simultaneously start making contributions to a Roth IRA. I’m not sure if I should keep it with Fidelity or go with another company such as T. Rowe? due to the fees they charge are less. Not sure what to do? any suggestions?

    • I would go where not only the fees are less, but where there is better service. Do a search on how both companies are rated.

  • Karlene Ramsden

    I am contributing the max to my 403B plan, n I also have a Roth IRA within the plan that I am contributing too, not maxing our the Roth though, cause I have a Traditional IRA that I transferred to TRowe Price from my previous job, so more is going to that account than to the Roth. Presently, I need to pay less tax as possible, however my intentions are to roll over traditional into the Roth in the latter years when my tax rate reduces, providing Congress don’t mess with the rules again👍

    • Yes @@karleneramsden:disqus ! It sounds like you’re on point. 🙂

  • Altonya Thomas

    Budgetnista,
    Which is better to do Roth or 401k pre-tax?

    • I would put as much money as my company matched in a 401k pre-tax, then put the rest of what I planned for retirement in a Roth

  • LaTasha Camp

    I have TSP at my job that’s matched at 5% but I also have a small traditional IRA from a previous employer that I’m not sure what to do with. It’s currently with USAA but I didn’t know how to contribute to it or if I could contribute since i have TSP. Any suggestions?

    • gm roberts

      Following. I have TSP and a small IRA – traditional with my credit union. I’m going to check Ally out for a Roth IRA. What is the AGI limit for a Roth IRA?

  • Nicole Garris

    I love learning about things I heard about but was never taught. I can see my future getting better the more I learn from Mrs.Budgetnista. And Roth IRA Here I come☺☺☺☺☺

  • Jeanette

    Currently researching the best place to open a Roth IRA before I invest.

    • Good!

    • Marynee

      Hey! What did you find to be the best Roth IRA account? I’m looking to set up an account, and would like to know your advice!

  • Crystal Morgan

    The one thing I recently learned is that your income determines how much you can contribute in the Roth IRA or Traditional IRA. I have a very unique situation so I’m going to be consulting a tax accountant this year before I make any contributions. Hoping I can find some ways around this.

    • That’s good idea. There are always multiple ways to achieve a goal.

  • Shamika Hartgrove

    Thank you Tiffany. I too had to withdraw from my 401K early due to a financial pinch. I pray to rebuild my account soon. I am going to look I to the ROTH IRA options now. Thank you again😙

  • Gail edwards

    I withdrew money from my 401k due to Hurricane Harvey. I heard that I can claim the taxes i paid on the withdrawl. That will be an extra 430.00 extra I will receive on my refund.