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), until you’re over age 70. You’ll also have creditor protection in most qualified plans. Those are some of the pros.
One of the disadvantages of a typical qualified plan are choice limitations. A typical plan will have 10 or 15 options, and that’s it. 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. That’s a big pro.
With planning done by an experienced estate planning attorney, you may be able to designate trusts as the beneficiaries of your IRA that can preserve these assets in their tax-deferred “cocoon” for young kids or grandkids. The value over time of that account could grow exponentially, which could mean your kids or grandkids have plenty for college and retirement.
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, the biggest difference between the qualified plan and the IRA has to do with service and planning.
A 401(k) or IRA is often a large source of income in retirement, but could also be a tool for generational wealth planning if you work with a savvy and experienced estate planning attorney. Make sure to speak with your attorney about your retirement accounts’ beneficiary designations to ensure they align with your overall estate plan.
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Reference: wjbf.com (June 26, 2017) “Advantages and disadvantages to a 401k and an IRA”
