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IRA vs. 401(k): Which is Right for You?

When planning for retirement, understanding the differences between an IRA and a 401(k) is crucial. Both offer tax advantages, but they serve different purposes and have unique benefits. At O1ne Mortgage, we are here to help you navigate these options. Call us at 213-732-3074 for any mortgage-related needs.

Understanding IRAs and 401(k)s

A 401(k) is an employer-sponsored retirement plan, while an IRA (Individual Retirement Account) can be opened independently through banks, credit unions, or investment brokerages. Both allow you to save for retirement, but they operate differently.

401(k)

A 401(k) is a tax-deferred account provided by your employer. Contributions are made through payroll deductions, and employers often match a portion of your contributions. The money you contribute is tax-deductible, reducing your taxable income today, but you will pay taxes on withdrawals during retirement.

IRA

There are several types of IRAs, with Traditional and Roth IRAs being the most common:

• Traditional IRA: Contributions may be tax-deductible, and your money grows tax-deferred. Taxes are paid upon withdrawal.
• Roth IRA: Funded with after-tax dollars, allowing tax-free withdrawals of contributions at any time. However, early withdrawal of earnings may incur taxes if done before age 59½.

Can I Have Both an IRA and a 401(k)?

Yes, you can have both. Here are a few reasons to consider it:

• Different Contribution Limits: In 2023, you can contribute up to $22,500 to a 401(k) and $6,500 across all IRAs. Those 50 and older can make additional catch-up contributions.
• Tax Diversification: 401(k) withdrawals are taxable, while Roth IRA withdrawals are tax-free, providing a mix of taxable and non-taxable income in retirement.
• Avoid Early Withdrawal Penalties: Roth IRAs allow penalty-free withdrawals of contributions before age 59½, offering liquidity in emergencies.
• Avoid Required Minimum Distributions (RMDs): Traditional IRAs and 401(k)s require RMDs starting at age 73, but Roth IRAs do not.

Pros and Cons of 401(k)s

Pros

• Higher contribution limits
• Tax-deductible contributions
• Tax-deferred growth
• Potential employer match

Cons

• Taxes on withdrawals
• Early withdrawal penalties
• Required minimum distributions

Pros and Cons of IRAs

Pros

• Additional retirement savings
• Tax benefits
• Flexibility with Roth IRAs

Cons

• Lower contribution limits
• Potential non-deductible contributions
• Early withdrawal penalties for Traditional IRAs

Is It Better to Have an IRA or 401(k)?

Both IRAs and 401(k)s offer valuable tax benefits and can be part of a robust retirement strategy. Your choice depends on your financial situation. If your employer offers a 401(k) with a match, it’s wise to contribute enough to get the match. If you have additional funds, consider an IRA for further tax advantages.

The Bottom Line

Combining an IRA with a 401(k) can enhance your retirement savings. Ensure you contribute enough to your 401(k) to receive any employer match. For personalized advice and assistance with your mortgage needs, contact O1ne Mortgage at 213-732-3074.

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