If you are starting a small business in your twenties, the word retirement sounds like a foreign land that is far, far away. As you reach your forties, retirement is right around the corner. It feels as if the sword of Damocles is hanging over your head. Questions like, am I doing enough? Will I have enough money to live on when I retire? One gets baffled by looking at the funding options and might question if one is going in the right direction? So, do you have a plan when you retire? If no, don’t worry! We will overview the two most important and popular retirement options – 401(k) funding and an IRA (Individual Retirement Account). Making retirement plan can be challenging and overwhelming, so here we have presented all the important aspects of both retirement plans so that you can make a decision with ease.

What is 401(k) funding?

The retirement plans such as 401(k), 403(b), and 457 are generally sponsored by the potential employer. Most of the companies offer retirement plan so its employees can retire without worrying about money. Basically, this funding allows the employee to delay a certain portion of his or salary. In doing so, the employee doesn’t have to pay tax on that deferred amount as that amount is pre-tax. There is a certain limit to which you can defer up to $19,000. As of 2019, this was the limit but one should look out for changes. If you are under 50 then the limit cannot exceed from $19,000, but if you are older than 50 then, get to defer an additional amount of $6,000.

Furthermore, most companies have the option of automatic enrollment, still, it is wise to check in with your employers. Usually, companies put 4% of your yearly salary aside. Although the experts recommend that you should save 10% of your yearly salary for retirement. For example, if you are earning $40,000 yearly then ideally you should be deferring $4,000. Be mindful that the money your 401(k) account has pre-tax. In simpler terms, it means that you will clear out all the taxes once you withdraw the amount.

Now that you knew the workings of 401(k) funding, let us explore the mechanics of IRA.

What is an IRA?

In a layman, an IRA account is a type of savings account where an employee puts his or her money, and the interest that comes with it is not payable until unless you decide to retire officially. The companies that do care for their employees offer a 401(k) plan, but there are various companies that do not have a plan of this sort. For them, an IRA is a perfect retirement plan. Typically, in the case of a traditional IRA, one is not obliged to pay the taxes on the potential assets till withdrawn. On the other hand, a Roth IRA has a different flow. Here, the employee pays the tax on the potential asset and income before he or she contributes the money to a retirement account. And on the time of retirement, the employee doesn’t have to pay any tax. The annual IRA contribution limit for 2019 is $6,000 and if you are above 50 years old the number varies a bit.

We have broken down 401(k) funding and an IRA (Individual Retirement Account) so that you are able to make a wise decision. Now, look at the major differences between these two retirement plans.

Who is in charge?

As a 401(k) funding is a retirement plan that is sponsored by your employer, so at the end of the day, he or she is in charge of making the decisions. As your employer is in charge, so it won’t be easier for you to carry out alterations in your account again and again. There is a limitation to the number of times you can make changes. On the other hand, with an Individual Retirement Account, you have the liberty to sell your potential assets whenever and wherever your heart desires! Since the employee is the charge, so he or she can make decisions without seeking approval from their employer.

At the time of crisis!

As it is mentioned earlier that 401(k) is an employer-sponsored retirement plan. So what will happen if you decide to go to quit your job? Obviously, you can’t take your previous companies to plan with you to your next job. In addition to this, if the company is going through a financial crisis, then the employee has to face adverse consequences. In scenarios like these, an IRA is a better retirement funding plan.

Early retirement

Due to whatever circumstances, if you decide to retire early, then you have the liberty to withdraw the funds before you hit 59 without paying any penalties. On the other hand, for every withdrawal made on an IRA, you have to suffer 10 percent of the penalty.

401(k) allows you to make a withdrawal to the number of times, on specific terms and conditions.


As compared to IRA, 401(k) is more affordable. The 401(k) funding plans allows purchasing assets at the market rate. IRA does not have lower fees, 401(k) fees is lower and thus, it is more efficient retirement plan to save more money. In addition to this, a 401(k) funding gives you access to stable value fund. It an ideal investment option to preserve the capital that is required for the growth of your business. IRA doesn’t give you access to any additional investment options.

Most of the employees and small business manager prefer to rollover their 401(k) funding into an IRA. One should consider all these factors before making that kind of financially significant decision.

All things considered, if you worked about retiring then, you must study all the aspects of these two funding plans. For more information about 401(k) funding and an IRA (Individual Retirement Account), head over to our website. You can also follow us on Twitter (@Onlinecheck) and Facebook (@Onlinecheck) for tips and tricks to apply for an ideal retirement plan. If you are still unsure about these plans, then get in touch with the financial advisors of the Merchant Advisors.

Small Business Financing News │ Merchant Advisors | blog
401(K) funding Vs IRA - Which Is An Ideal Retirement Plan?
401(K) funding Vs IRA - Which Is An Ideal Retirement Plan?
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Thinking about the choosing the ideal retirement plan between 401(k) and an individual retirement account (IRA)? Here is what you need to know about.
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