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Comparing Pension Options: 401(k), IRA, and More

January 23, 2023
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A&I Wealth Management > Info > Comparing Pension Options: 401(k), IRA, and More

When it comes to retirement planning, there are a variety of options available to individuals. Two of the most popular options are the 401(k) and the Individual Retirement Account (IRA). However, there are other options available as well, each with their own advantages and disadvantages. In this article, we will take a closer look at the 401(k), IRA, and other pension options, comparing and contrasting the features of each.

401(k)

The 401(k) is a retirement savings plan offered by many employers. It is named after the section of the Internal Revenue Code that governs it. One of the main advantages of a 401(k) is that it is sponsored by an employer, which means that the employer may match a portion of the employee’s contributions. Additionally, the money in a 401(k) grows tax-free until it is withdrawn in retirement. Some other benefits may include:

  • Possibly more creditor protection (IRAs are held to state creditor laws regarding malpractice, divorce or other lawsuits; their maximum caps can be lower than ERISA protections).
  • The ability to take loans from the plan (or there are existing loans).
  • The ability to take penalty-free withdrawals before age 59 1/2 (if the client is planning to retire between ages 55 and 59 1/2).
  • Ability to do back-door Roth contributions.
  • The ability to defer mandatory distributions if still working past age 72.
  • If the employee owns appreciated employer securities, potential loss of favorable tax treatment of net unrealized appreciation (NUA) if the assets are all rolled into an IRA.  An experienced financial advisor can mitigate this by taking out the NUA assets as a lump sum distribution. Learn more.
  • The potential to opt for guaranteed annuity-like payments from the plan at retirement (if available).
  • Death benefit (if available).
  • Additionally, the contribution limits for a 401(k) are generally higher than those for a IRA.

However, there are also some downsides to a 401(k). One of the main disadvantages is that the money in a 401(k) is tied to the employer. If an employee leaves the company, they may be forced to cash out their 401(k) or roll it over into another retirement account. Additionally, there may be penalties for withdrawing money from a 401(k) before retirement age. For these reasons, and many more, people consider rolling money into an IRA.

IRA

cryptocurrency blog postAn Individual Retirement Account (IRA) is a type of retirement savings account that is not tied to an employer. This means that individuals can open an IRA on their own and make contributions to it regardless of their employment status. Like a 401(k), the money in an IRA grows tax-free until it is withdrawn in retirement.

One of the main advantages of an IRA is that it offers more investment options than a 401(k). Individuals can choose from a variety of investment options, such as stocks, bonds, and mutual funds. Other advantages of an IRA may include:

  • Ability to consolidate accounts and the convenience of having all the account administration and performance reporting handled in one place.
  • Broader array of investment options.
  • Financial planning, tax and estate planning services, risk analysis etc. from a financial advisor.
  • Integrated investment management and asset location.
  • Cash and withdrawal management—distributions from employer plans are often done pro-rata, forcing liquidation of invested assets.
  • Ability to directly debit management fees.
  • Avoid the hassle of multiple 401ks at prior employers.
  • Can make a clean break with former employer.
  • Can do partial Roth conversions in advance of RMDs.
  • Can tax-manage retirement distributions from various retirement accounts.
  • Can make Qualified Charitable Distributions (QCDs), tax-free, directly from the IRA.
  • Service, such as timely response for requests, questions, and support.

However, there are also some downsides to an IRA. One of the main disadvantages is that there is no employer match, which means that individuals are solely responsible for funding their own retirement. Additionally, there may be penalties for withdrawing money from an IRA before retirement age.

Other Pension Options

In addition to the 401(k) and IRA, there are other pension options available to individuals. These include:

  • Traditional pensions: Also known as defined benefit plans, traditional pensions provide a guaranteed income to employees in retirement. These plans are becoming less common, as many employers have moved away from them in favor of defined contribution plans like the 401(k).
  • Roth 401(k): This is a variation of the traditional 401(k) in which contributions are made with after-tax dollars. This means that the money can be withdrawn tax-free in retirement.
  • SEP IRA: A Simplified Employee Pension (SEP) IRA is a retirement savings plan that is designed for small business owners and self-employed individuals. Like a traditional IRA, it offers more investment options than a 401(k).
  • Annuities: An annuity is a financial product that provides a guaranteed income in retirement. There are a variety of annuities available, including fixed, variable, and indexed annuities.

When it comes to retirement planning, there are a variety of options available to individuals. Each option has its own advantages and disadvantages, and it is important to carefully consider all of them before making a decision.

Conclusion

For further information about retirement options: