Differences Between myRA, IRA (including Roth) and 401(k)

Retirement planning is an overwhelming proposition, whether you’re just starting out or looking into rolling over an account you’ve had for decades. Not only do the laws change year after year, but the many types of accounts seem like they should be much more similar than they are. Don’t worry, we’ve got you covered in this short guide outlining the major features of, and differences between, IRAs (Traditional and Roth), myRA and 401(k)s.

IRAs are Accounts, not Investments

The biggest thing that sets IRAs apart from other forms of retirement accounts is that they are literally just accounts and not investments. How you choose to invest them isn’t tied to the account type — and with the exception of derivatives, you can invest your money as you please.

Eligibility: Contributions to a traditional IRA can only be made up to age 70½, provided you earned income in that year. Roth IRAs allow contributions at any age, as long as your income is below $131,000 for singles and $193,000 for married couples who file their taxes jointly. You can open an IRA whether or not you have a 9-to-5, even self-employed individuals are eligible.

Contributions: Most IRA contributions come from gross income and the account grows tax-deferred. This changes in the case of Roth IRAs, which are taxed up front. In either case, you can only contribute $5,500 each year to your account, unless you’re over 50, when you can add another $1,000 to your piggy bank annually.

Distributions: Penalty-free distributions can start as soon as age 59½, but must begin in the year after age 70½. Generally, Roth IRAs allow you to withdraw any money you’ve contributed without penalty, but a traditional IRA will require you use the money for a qualifying event, like buying a home, until you’re otherwise eligible to be penalty-free.

myRA Incentivizes Early Savings

myRA should be considered a beginning retirement account. These new products are a safe and secure savings account, invested in Treasury Bonds. You won’t get a ton of interest from a myRA account, but they don’t cost anything to manage and can accept contributions as low as $5 per paycheck, making them a great way to get into the habit of saving for retirement.

Eligibility: Anyone who receives a weekly check from an employer and makes less than $129,000 as a single taxpayer or $191,000 as a married couple is encouraged to open a MyRA account. Unfortunately, self-employed and freelance folks are left out since there’s no mechanism currently in place for them to contribute.

Contributions: Contributions as small as $5 a paycheck are encouraged, but if you choose to make a higher contribution, beware of the cap. Like all IRAs, myRA has a $5,500 yearly cap, but unlike similar products, you can only invest $15,000 before you have to roll it over.

Distributions: The money you contribute is yours to withdraw at any time, for any reason. However, you’ll have to wait until you’re 59½ to take out the earnings. Don’t worry, though, you can roll this IRA over into a larger IRA or 401(k) without penalty.

401(k)s Can Become Significant Employee Benefits

Although many people have 401(k)s available to them, fewer realize that this is, in fact, an employee benefit. Unlike IRAs, a 401(k) is designed for your employer to contribute some amount of money on your behalf. Many do this under a matching system, which can make for an incredible boost to your retirement savings over the long-term.

Eligibility: Anyone whose employer offers a 401(k) is eligible to contribute. Unlike IRAs, there is no income cap on participation.

Contributions: Contributions are typically deducted from your gross income, making them a pre-taxed investment. You can contribute as much as you like, up to $18,000 a year starting in 2015; employees 50 and over can add an additional $6,000 to that number. Your employer can contribute an amount equal to 100 percent of your income, or $51,000, whichever is smaller.

Distributions: Like IRAs, you’ll start taking your tax-free distributions at age 59½, unless you’re still working. Regardless of work status, though, you’re required to start taking distributions in the year you turn 70½. Unlike IRAs, you can’t withdraw your investment, but you can borrow against it once you’re vested, if your employer allows.

IRAs and 401(k)s are Great for Retirement Savings

Most retirement experts will recommend you diversify and put some money into an IRA and some more into your 401(k). Employer-matching 401(k)s are an amazing savings tool that shouldn’t be ignored — so if you’ve only got enough money budgeted for savings to choose one, go for the gold with a 401(k). Your money will grow twice as fast without your doing anything besides remaining employed.

People who have a low match or a lot to contribute are probably best off to invest the amount beyond their 401(k) match to the IRA of their choosing. Absolutely everyone who’s eligible should start a myRA account — they’re no-lose propositions.

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