Retirement jargon can get confusing, especially when it comes to understanding which savings plan is right for you. Many employees choose to successfully plan for the future using an Individual Retirement Account (IRA). IRAs allow you to save money for retirement with tax-free growth or on a tax-deferred basis. It’s an account where you keep stocks, bonds, mutual funds and other assets.
The big difference between an IRA and 401k:
A 401k allows employees to contribute a portion of their wages into this account. A 401k is set up by the employer, whereas an IRA is set up by the individual. The plus side to a 401K is that many companies will match or contribute to the 401k as well, however these savings alone might not be enough for retirement.
Why Invest in an IRA?
As mentioned earlier, IRAs have potential tax deferred or tax-free growth. It can also supplement your employer-sponsored savings plans, and tap into a wider range of investment than your 401k. Many financial experts estimate that you need around 85% of your pre-retirement income in retirement, and a second savings plan can help achieve that goal.
Before investing in an IRA, please consult with a financial advisor. There are different types of IRAs, so it’s important to find which one works best with your finances. To learn more about the types of IRAs (traditional, roth, etc), click here.