Understanding Retirement Accounts: IRAs vs. 401(k)s

Planning for retirement is important at any age. Knowing your options is a key step to achieving financial security. Two primary tools that can significantly impact your retirement readiness are Individual Retirement Accounts (IRAs) and 401(k) plans.

Let’s look at the differences and the best ways to maximize employer contributions. We will discuss when to choose Roth or traditional accounts. We will also see how Lafayette Federal Credit Union can help you manage your IRA.

Individual Retirement Accounts (IRAs)

An IRA is an account you can open independently, regardless of your employment status. It provides more flexibility in investment choices such as stocks, bonds, mutual funds, and certificates. The annual contribution limits for 2024 are $7,000 ($8,000 if you’re 50 or older).

401(k) Plans

A 401(k) is typically offered by your employer and funded through payroll deductions. Contribution limits are higher compared to IRAs, allowing up to $23,000 per year ($30,500 if you’re 50 or older in 2024). Employer matching contributions are a major advantage of 401(k) plans.

The employer match is a key advantage of a 401(k) plan and can significantly boost your retirement savings. Here’s how to maximize it:

1. Know Your Employer’s Matching Plan: Many employers match their employees’ contributions dollar-for-dollar. This usually goes up to a certain percentage of their salary, often between 3-6%. However, some employers may offer higher amounts.
2. Contribute Enough to Get the Full Match: Always give at least the minimum amount to get the full employer match. If your company matches up to 5%, contribute at least 5%.
3. Increase Your Contributions Gradually: Aim to increase your contributions by 1% each year, eventually maxing out your allowable contribution.

Taking advantage of employer contributions is essentially “free money” towards your retirement, so ensure you optimize this benefit fully.

When choosing between a Roth and a traditional account, focus on your current taxes and future expectations.

Choose a Traditional IRA or 401(k) if:

• You’re currently in a high tax bracket but expect to be in a lower bracket in retirement.
• You want immediate tax deductions to reduce your current taxable income.

Choose a Roth IRA or 401(k) if:

• You’re younger or currently in a lower tax bracket, expecting higher earnings in the future.
• You prefer paying taxes now to enjoy tax-free withdrawals during retirement.

Balancing contributions between Roth and traditional accounts can offer significant tax advantages and greater flexibility in retirement.

At Lafayette Federal Credit Union, members have access to robust IRA options designed to meet diverse financial goals:

Traditional IRA

• Contributions are pre-taxed income and may lower your current tax liability, depending on your income.
• You can defer taxes until withdrawal, potentially during a lower tax bracket in retirement.

Roth IRA

• Contributions are made with after-tax income. Withdrawals taken during retirement remain tax-free, provided you meet certain conditions. Contributors usually must keep their contributions for five years. If they withdraw early, they may face a penalty from the tax authority.
• Ideal for younger investors or those expecting their income to rise significantly.

IRA Share Certificates

• Higher fixed interest rates than regular savings accounts.
• Terms range from short-term (one year) to long-term (five years), providing flexibility and guaranteed returns.

Lafayette Federal Credit Union also offers personalized financial advising to help members select and manage IRAs effectively, ensuring alignment with individual retirement goals.