What are the tax implications of choosing an IRA over a 401(k)?

What are the tax implications of choosing an IRA over a 401(k)?

When comparing an IRA to a 401(k), the tax implications can vary significantly. With a traditional IRA, contributions may be tax-deductible, and taxes are paid upon withdrawal. In contrast, 401(k) contributions are often made pre-tax, reducing your taxable income in the year you contribute, but taxes are also due upon withdrawal.

Are there any penalties for early withdrawal from either account?

Yes, both accounts have penalties for early withdrawal. For traditional IRAs and 401(k)s, if you withdraw funds before age 59½, you typically face a 10% penalty on top of regular income tax. However, there are some exceptions for certain circumstances.

What about Roth IRAs? How do they differ?

Roth IRAs differ significantly because contributions are made with after-tax dollars, meaning you pay taxes upfront. However, qualified withdrawals in retirement are tax-free, which can be a significant advantage if you expect to be in a higher tax bracket later.

Can I have both an IRA and a 401(k)?

Yes, you can have both an IRA and a 401(k). Many people choose to contribute to both to maximize their retirement savings and take advantage of the different tax benefits each account offers.