While both 401(k) plans offered by employers and individual retirement accounts (IRAs) serve as popular retirement saving options, there are significant differences between the two. One major distinction is the degree of investment flexibility. While employees are often restricted to a limited selection of investment funds within a company-sponsored 401(k), IRAs provide the freedom to invest in a wide range of stocks, bonds, mutual funds, and exchange-traded funds (ETFs). This can be useful for individuals who wish to diversify their portfolios beyond traditional options or have specific investment goals, such as wanting to invest in Nvidia (NASDAQ: NVDA) stock.
Another notable difference pertains to early withdrawals. In general, withdrawals from both 401(k)s and IRAs must wait until the age of 59 ½. However, 401(k)s allow for certain exceptions. For instance, once an employee separates from an organization, they may withdraw funds without penalty if they are over the age of 55. Meanwhile, IRAs offer two unique exemptions: one permits the withdrawal of up to $10,000 for a first-time homebuyer, while another enables withdrawals for educational costs without penalty.
Overall, IRAs exhibit greater flexibility when compared to 401(k)s regarding both investment choices and early access to funds. Nonetheless, even if an individual already has a 401(k) or comparable plan, it could be advantageous to supplement it with an IRA, following the completion of maximum matching contributions from the employer.
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1 Major Difference Between 401(k)s and IRAs That You Should Know, Before You Save Any More for Retirement was initially published by The Motley Fool.
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