New regulations from the Department of Labor may come into play for Americans deciding which type of account is best for their retirement savings.
There are significant differences between 401(k)s and IRAs, and as reported in a recent post on wjbf.com, “Advantages and disadvantages to a 401k and an IRA,” a number of new regulations from the Department of Labor makes this a good time to review the pros and cons of these popular retirement savings plans.
401(k): A 401(k) can potentially be less expensive than other investment vehicles, due to the number of participants. Many also have a loan provision for access to your principal, if you need it in an emergency. If you retire early, qualified plans may have an age 55 withdrawal privilege that gets you around the 10% withdrawal excise tax provision. However, if you’re still working, you may be able to push back your required minimum distribution (RMD), if you’re over age 70 and still participating in the plan. You’ll also have creditor protection in the typical qualified plans. Those are some of the general positives.
One of the disadvantages of a typical qualified plan are choice limitations. A typical plan will have 10 or 15 options. That’s it for choices. The loan provision can also be a negative, if you terminate—the loan becomes distributable and becomes a taxable event (unless you can pay it back). You’d also be subject to the IRS rules concerning distributions. A 401(k) plan itself can have more rules around distributions that might make it even more difficult to distribute. Managed portfolios will be plan-specific with little customization to individual participants.
IRA: A major advantage of an IRA is the number of options. There are thousands of different investment options for a customized strategy and better tax efficiency. There is also more flexibility in beneficiary designations and distributions, stretch IRAs and distributions to potential beneficiaries.
One disadvantage of an IRA is that the costs may be higher. There’s also no way to take a loan from an IRA—that’s an IRS rule—and there is also no early distribution at age 55. However, biggest difference between the qualified plan and the IRA has to do with service and planning.
The 401(k) or IRA is likely to be your biggest source of income in retirement. Make sure to speak with an estate planning attorney to be sure that your retirement accounts work with your overall estate plan.
For more information on Asset Protection, Tax Planning, Beneficiary Designations, Life Insurance, IRA, 401(k), Required Minimum Distribution (RMD); please click to my website