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IRA vs. 401(k): How to Choose

March 01, 2021
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We know, at times, that retirement decisions can be confusing and there is substantial information surrounding the investment vehicles that can be utilized to reach your retirement goals. We thought we’d send along some information outlining a few of the differences between 401(k)s and IRAs. While both vehicles share some similarities such as tax-deferred retirement savings, IRA accounts have some benefits that 401(k) do not, here are a few:

Combine your RMDs. If you have multiple 401(k) accounts when you are 72 or older* and no longer working, you’ll need to take your RMDs from each 401(k). If you have multiple IRAs, you can combine the RMDs and take them from any single IRA account. (*or 72 if you reached that age before Jan. 1, 2020)

Take an early distribution. While it’s best to avoid using retirement savings for other purposes, when the unexpected occurs, being able to access them can give you options – even if you must pay income tax and a penalty for an early withdrawal. This option is guaranteed under the law with IRAs; whether you have this same ability with your 401(k) depends on your plan’s rules.

Use funds for qualified expenses. Although early withdrawals from pretax retirement accounts generally incur a penalty, there are legal exceptions for IRAs, including using funds for higher education expenses, paying medical premiums in the event of job loss or using up to $10,000 toward a first home purchase.

Make a qualified charitable distribution (QCD). If you are 72 or older, you may contribute up to $100,000 directly from your IRA account to a charity. Because the QCD is not counted as income, it may lower your tax bill more than if you take a distribution and make a separate donation. Plus, the QCD can offset part or all of your RMD. However, under the SECURE Act, IRA owners must reduce intended QCDs by any IRA contribution amounts made after age 70½.

More investment choices. Commonly, 401(k) plan sponsors limit investors to a few select investment options, some of which may be accompanied by high fees. In contrast, except for prohibited investments, such as life insurance or collectibles, choices are nearly limitless in an IRA.

If you have retirement funds sitting elsewhere and need help deciding whether to roll a 401(k) into an IRA or to consolidate retirement accounts, give us a call to discuss what would be the best option for you. We’re more than happy to answer any questions!