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The positives and negatives of 401(k)s and IRAs

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A recent article published on InvestingAnswers.com highlights some of the major advantages and disadvantages to two popular forms of savings, 401(k)s and individual retirement accounts (IRAs). Both of these types of accounts allow people to contribute pre-tax dollars and defer from paying taxes on interest and capital gains until payouts begin.

Some of the strengths of 401(k) plans include high contribution limits, varying levels of employer contributions and the ability to borrow from the account in an emergency. Funds contributed to a 401(k) can also be deducted from an individual's net income, reducing overall taxation.

In terms of drawbacks, many employers don't offer much of an investment selection on 401(k) accounts. Early withdrawal incurs a taxation penalty, and payouts are taxed as additional income. Most employers require new employees to wait six months or a year before they can invest in a 401(k).

IRAs are set up by the individual, normally with minimal or no help from a financial advisor, reducing cost. IRA investors also normally have a much wider selection of investment options, and the accounts are much more flexible to change than most 401(k)s.

A major drawback of IRAs is that many have limited contribution maximums and low contribution rates. Early withdrawals are also heavily taxed in the same manner of 401(k)s.

Those looking for additional ways to put aside funds for retirement may be interested in the savings offered by annuities. 

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