March 16, 2021
IRA vs 401k
Attorney Chris Berry explains the difference between IRA and 401k in this episode of Daily Wisdom.
Both are pre-tax accounts but have their differences.
IRA or Individual Retirement Account got full control and access while 401k which is company-sponsored got more restrictions.
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Episode Transcript
IRAs versus 401(k)’s
Both of these are pre-tax accounts. Well, I guess you could have… Well, you can have Roth 401(k)’s and you can have Roth IRAs. But really the difference here is an IRA is a individual retirement account. So it’s, you have full control of it. You have full access to how it’s invested. You can even set up IRAs that own real estate. You can have annuities inside of your IRAs. You can have the money in the market. You can have checking and savings. So you have a lot more freedom with the IRAs. The 401(k)’s, you can only invest in what that plan sponsor allows you to invest it. And a lot of times companies will pay extra fees to make sure that just their mutual funds can be inside of that 401k.
So I’m a big fan of almost always rolling money over to an IRA from a 401(k) or a 403(b). There might be certain exceptions to that rule. Sometimes there will be fixed accounts that offer like a 3% rate of return if you’re really conservative. And you might want to keep that inside of your 401(k). But just, 401(k)’s typically have more restrictions, less flexibility. I would say nine times out of 10, we would look at rolling over to an IRA. There’s certain exceptions when keeping it as a 401(k) makes sense.
Keeping the Money at the 401(K)
For example, if you were to let’s say, leave a job prior to 59 and a half, if you leave it in a 401(k), you can pull the money out if you’re older than 55 without penalty, versus if it’s in an IRA, you would face that 10% penalty. So actually we had a client who that was the situation. They ended up changing employments. They wanted to pull some money out to put down a down payment on a house. They were younger than 59 and a half. But by us keeping the money at the 401(k), they could pull the money out, pay the tax and without having to worry about the penalty.
So typically we’re going to roll things over to an IRA. Sometimes I hear people say, “Well, there’s less fees in a 401(k) versus an IRA. Typically, really there’s not. You’re just going to see expense ratios inside of those mutual funds. So again, typically we’re doing the IRAs.