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What’s the Difference Between a 401(k) and an IRA?

IraHere are some of the possible advantages and disadvantages of a 401(k) and an IRA.

As of June 9, there are several new regulations from the Department of Labor concerning IRAs and qualified plans. Let’s look at the advantages and disadvantages of qualified plans and IRAs.

401(k): A 401(k) can potentially be less expensive than other investment vehicles, due to the number of participants. Many also have a loan provision for access to your principal, if you need it in an emergency. If you retire early, qualified plans may have an age 55 withdrawal privilege that gets you around the 10% withdrawal excise tax provision.  However, if you’re still working, you may be able to push back your required minimum distribution (RMD) if you’re over age 70 and still participating in the plan. You’ll also have creditor protection in the typical qualified plans. Those are some of the general positives.

 One of the disadvantages of a typical qualified plan is choice limitations. A typical plan will have 10 or 15 options. That’s it for choices. The loan provision can also be a negative if you terminate—the loan becomes distributable and becomes a taxable event (unless you can pay it back). You’d also be subject to the IRS rules concerning distributions. A 401(k) plan itself can have more rules around distributions that might make it even more difficult to distribute. Managed portfolios will be plan-specific with little customization to individual participants.

IRA: A major advantage of an IRA is the number of options. There are thousands of different investment options for a customized strategy and better tax efficiency. There is also more flexibility in beneficiary designations and distributions, stretch IRAs and distributions to potential beneficiaries.

The potential disadvantage of an IRA is somewhat higher costs. There’s no loan provision in IRAs (an IRS rule), and the age 55 early distribution rules don’t apply in an IRA. The notable difference from the qualified plan to individual IRA is service and complex planning.

Reference: wjbf.com (June 26, 2017) “Advantages and disadvantages to a 401k and an IRA”

 

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