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A retirement account allows you to save money for your retirement in a tax-advantaged way, through either a tax-free growth or on a tax-deferred basis. To have a comfortable retirement, according to top leading financial experts, you will need to supplement at least 80% of your pre-retirement income. Social security benefits along with an employer-sponsored savings plan, such as a 401(k), might not be enough to accumulate the savings you need. Fortunately, you can contribute to both a 401(k) and an IRA.

Traditional IRA:

A traditional IRA is a type of retirement account that lets you invest pre-tax dollars and allows your earnings to grow tax-deferred. While your contributions are qualified for tax deductions, you will pay taxes on your investment gains only when you make withdrawals in retirement.

Roth IRA:

A Roth IRA is is a great, tax-efficient way to save for your retirement, because it’s a type of retirement account that you fund with after-tax dollars. While your contributions are not tax deductible, your future withdrawals are tax free.

401(k):

A 401(k) is a retirement savings plan sponsored by an employer. It allows workers to save and invest a portion of their paycheck before taxes are taken out. Some employers have matching contributions, with the most popular being 3%. Similar to a traditional IRA, taxes aren’t paid until the money is withdrawn from the account.

SEP IRA:

A Simplified Employee Pension (SEP) IRA is a type of traditional IRA for self-employed individuals or small business owners.

Simple IRA:

A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a type of traditional IRA for small businesses and self-employed individuals. As with most traditional IRAs, your contributions are tax-deductible, and your investments grow tax deferred until you are ready to make withdrawals in retirement.

TSP (Thrift Savings Plan):

A TSP serves as a defined-contribution plan designed to give federal employees some of the same retirement-savings benefits offered to workers in the private sector. TSP can either be tax-deferred (traditional) or tax-exempt (Roth).

403(b):

A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan that is administered by state or local governments and offered to employees of public schools and certain charities, tax-exempt organizations, and other nonprofits.

457(b):

The 457(b) plan is a type of nonqualified, tax-advantaged and deferred-compensation retirement plan that is available to governmental and certain non-governmental employees in the United States. Employees defer compensation into a 457(b) account on a pre-tax (traditional) or after-tax (Roth) basis.

Pension Plan:

A pension plan is a form of Defined Benefit (DB) retirement plan.  These pensions provide a set level of income in retirement. The taxable part of pension payments is generally subject to federal income tax withholding.

A rollover IRA is a type of traditional IRA. It’s most often used by people who change jobs or retire and need to move their 401(k), which is attached to their employment, into a new financial vehicle. You generally can’t keep your investment in an employer-sponsored 401(k) when you no longer work for the employer (though there may be a specific grace period associated with each type of account or employer plan).

Simply withdrawing all the funds from a 401(k) is an option but this can lead to hefty tax penalties. You’ll pay at least a 10 percent penalty for early withdrawal if you are below age 59 1/2.

You can move the value of your 401(k) into a traditional IRA without incurring tax consequences. This is because a traditional IRA is funded with pretax dollars just like a 401(k). You lose some of these tax benefits if you choose to roll any of your retirement funds into a Roth IRA, which is not funded by pre-tax dollars. At that time, you would have to pay taxes on those funds. Before determining how to complete a rollover IRA, speak with a Senior Portfolio Manager at Allegiance Gold to determine the best ways to put your 401(k) funds into a precious metals IRA.

One of the biggest differentiators between traditional IRAs and Roth IRAs is that you fund traditional IRAs before taxes and Roth IRAs after taxes. This means that traditional IRAs offer some tax incentives at the time you are saving. Earnings on your traditional IRAs may also be taxed, whereas Roth IRA earnings and withdrawals usually aren’t taxed.

The following table highlights the similarities and differences between the traditional and Roth IRAs.

 

Features	Traditional IRA	Roth IRA
Who can contribute?	You can contribute if you or your spouse are filing jointly, have taxable compensation, and are aged 70½ or older.	You can contribute at any age if you or your spouse are filing jointly, have taxable compensation, and have a modified adjusted gross income that is below certain limits.
Are my contributions deductible?	Yes. You can deduct your contributions.	No. Your contributions are not deductible.
How much can I contribute?	The most you can contribute to all of your traditional and Roth IRAs is: $6,500 if you’re under the age of 50, or $7,500 if you’re age 50 or older by the end of the year.
What is the deadline to make contributions?	Your tax return filing deadline (not including extensions)
When can I withdraw money?	You can withdraw money at any time.
Do I have to take required minimum distributions (RMD)?	Yes. You must start taking your RMD by April 1, following the year in which you turn 70½ and by December 31 in subsequent years.	Not required if you are the original owner
Are my withdrawals and distributions taxable?	Any deductible contributions and earnings that are withdrawn or distributed from your traditional IRA are taxable.	None, if it’s a qualified distribution. Otherwise, part of the distribution or withdrawal may be taxable.
If I take distributions before I turn 59 ½, will there be an additional tax?	Yes. You may have to pay an additional 10% tax for early withdrawals unless you qualify for an exception.	Yes. You may have to pay an additional 10% tax for early withdrawals unless you qualify for an exception.

The 401(k) was established when Congress passed the Revenue Act of 1978. This act includes a provision that allows employees to avoid being taxed on a portion of income received as deferred compensation instead of direct pay. The idea was that workers would make voluntary contributions and employers would match up a portion; taxes would be deferred until the employee reached the age of 59 1/2. It was supposed to supplement the two traditional income streams for social security and pension retirees. Since the passage of the Revenue Act, 401(k) plans have become the primary source of income for more than 60 million American retirees.

Both IRAs and 401(k)s are extremely common retirement savings vehicles, with each serving distinct purposes. A 401(k) is a qualified, employer-sponsored savings plan for retirement that allows you to contribute while employed by the sponsoring company. Often, the employer will match a certain percentage of the funds, which can help you grow  retirement savings even faster. You fund a 401(k) with pretax dollars, usually taken right from your check before you receive your payment. This makes it easy to save because you don’t really miss the money.

A traditional IRA is a tax-advantaged retirement investment option that is not linked to an employer. Most people can invest in a traditional IRA with pre-tax dollars, making it a great option for the self-employed. You can also rollover your 401(k) savings into a traditional IRA without tax consequences if you leave your current job or retire and need to move funds from the employer-sponsored 401(k).

Both of these options are solid retirement savings plans, but you can’t always hold physical assets like Gold in a 401(k). If you are looking to diversify your portfolio with precious metals, contact Allegiance Gold to find out more about Gold IRAs.