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The Differences Between a 401(k) and an IRA

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Helping your employees plan for retirement can be stressful and exhausting. There are so many benefit options to choose from, and you are responsible for understanding the ins and outs of all of them, as well as making sure that your employees understand them. Today, we’ll help you break down two retirement plan options: 401(k)s and IRAs.

In the past, “defined benefit” plans were the norm, which promised a pension of a certain amount for retirement. These days, however, most retirement plans are “defined contribution” plans. In these plans, the employee and sometimes the employer, set aside a certain amount of money each year, quarter, month, or paycheck, for retirement. This money will accumulate over time to generate a set amount of payout depending on the market value of the account at the time of retirement. 

The two most common defined contribution plans that offer tax-advantaged retirement savings are 401(k)s and IRAs. While these plans are very similar, their differences are stark. Thankfully, your employees can choose both for an optimal retirement plan. However, let’s dive in to what exactly each plan entails.

Individual Retirement Accounts

Traditional IRA

An Individual Retirement Account, or an IRA, can be contributed to by anyone under the age of 70 ½. The assets in this plan will not be taxed until they are withdrawn, allowing for tax-deferred growth on investments. In a traditional IRA, people that don’t take part in an employer-sponsored plan may also make tax-deductible contributions.

Roth IRA

A Roth IRA offers tax advantages that are completely opposite of a traditional IRA. For example, in this type of IRA, you pay tax on income prior to making contributions, but no tax on your retirement withdrawals. As of 2019, a Roth IRA is only available to individuals who have an adjusted gross income of less than $122,000 per year, or $193,000 for married couples that are filing jointly.

For both a Roth IRA and a traditional IRA, the limit of annual contributions is $6,500 for people over 50 years old, and $6,000 for those under 50.

401(k)s

A 401(k), as well as a 457 and 403(b), are qualified retirement plans sponsored by the employer, making them only accessible to people who are employed by companies that offer these plans. The money contributed to this account is pre-taxed, meaning that taxes will not be taken from it during the year that it was earned. Instead, these taxes will be paid once the money is withdrawn for retirement. As of 2019, employees under 50 years old can contribute up to $19,000 of pretax income to a 401(k), and those over 50 can contribute a catch-up contribution of $6,000.

If you choose not to offer this plan, your employees can still start saving for retirement through an IRA. We suggest that you offer to match your employees’ contributions into their 401(k) up to a certain percentage of their salary. For example, you can offer to match their contributions up to 8%, so long as they contribute 8% as well. This will help increase overall employee satisfaction, reduce your turnover, and help you recruit top talent. 

Still unsure of what to offer or how to effectively explain these plans to your employees? Contact Delta Administrative Services. As a Professional Employer Organization (PEO), we specialize in helping small business owners manage their HR, offer better benefits, manage these benefits, and more. Schedule a call with Delta today to learn more about how you can grow your business by hiring a PEO.

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