For many people, financial planning involves setting up investment vehicles to help accumulate wealth for retirement. Popular options for retirement include a 401K, which will be set up by your employer or an IRA (Individual Retirement Arrangement), which you will have to set up yourself. Additionally, a simple brokerage account can be a valuable tool to add to your investment portfolio, but does not offer any specific retirement benefits.
In this article we will discuss the differences between these three accounts and the pros/cons of each. With any kind of financial planning it is always best to consult a financial professional first and to assist with the set up process.
A 401k is an investment account that is set up by your employer that you will have the option of participating in if you would like to. It is not mandatory to invest in your company's 401k program, however it is recommended. With a 401k, your employer will allow you to invest a certain percentage of your paycheck into the 401k plan. The employer will then match a percentage of your contribution into the plan which will grow tax-free until the allowed time of distribution as outlined in the details of the plan. Because of the employer contributions, a 401k is one of the best ways to invest your money for retirement, but money invested into the account will be subject to penalty if any funds are distributed before the age of retirement.
An IRA or Individual Retirement Arrangement is an investment plan that anyone can set up. Like a 401k, funds deposited in an IRA offer the benefits of tax free growth and can allow the investor to put away money for retirement, however, unlike a 401k this plan does not offer any contributions from other parties. An IRA can be offered as a Roth IRA or a Traditional IRA. Both types offer their own benefits which depend on your own financial status. Also, like a 401k, any funds withdrawn from the plan before retirement will be subject to a penalty.
A brokerage account is the most simple form of investment plan. You can add funds at any time of your life and invest any amount of money which can appreciate or depreciate based on the current financial market. Money in a brokerage account is liquid, meaning you can withdraw it at any time without being subject to a penalty. A brokerage account does not offer any specific benefits for retirement but does allow the owner to invest money in the current financial market.
For more information, consult a financial planner like Benchmark Financial Advisors.