401k vs. Traditional IRA

When thinking about retirement plans and funds, the two common terms thrown out to people are 401k plans and IRAs. While most people put money into these funds, they often don’t know how they work or which is better than the other. All they seem to know is that everyone else is saving for their retirement, and they don’t want to be left out. Yet, understanding differences between each plan can help in your quest for asset protection.

401k Retirement Plan

401k plans are retirement plans run by employers who use investment firms or banks to manage the funds. Many employers use an incentive program that matches the contributions made by the employee to a certain limit. In 2009, the tax-free limit of contributions to a 401k plan was $16,500, with an addition $5,500 limit for those above 50 years of age. These contributions are made from pre-tax dollars in your paycheck, and the gains made from in 401k investment are tax-free. However, early withdrawal before the age of 59 ½ will result in a penalty assessment of 10%.

Traditional IRA

Traditional IRA (Individual Retirement Accounts) are often used either as supplements to one’s 401k plan, or as the main retirement account if the person’s employer does not offer a 401k. You can choose from a variety of different IRAs offered by the banks, with investment styles ranging in conservative investment to high risk-high rewards. Traditional IRAs, generally speaking, have tax-free limit of contributions capped at $5,000 with an addition $1,000 for those over 50 years of age. However, a traditional IRA contribution for 2009 is fully deductible for single filers with an AGI of $55,000 or below (partially deductible between $55,000–$65,000).

IRA Estate Planning Legal Help

Understanding what plan works best financially shouldn’t be your only worry. You should also be concerned about the legal implications that the choice of retirement plans would have on your estate planning. An experienced estate and tax attorney can help you figure out which plans would benefit your heirs best, and provide information about asset protection