401(k) vs. Traditional IRA vs. Roth IRA vs. myRA

Retirement planning can be downright painful, and it's easy to see why. Weighing all of the available options, reading the fine print, and dealing with the uncertainty of whether you've chosen the right plan can seem like a chore, especially given that there's no immediate gratification.

Try to remember that there are great opportunities are out there to save for retirement, and the practical, financial advantages are clear. Whether you're an individual looking to learn more about your options, or a company representative researching what to offer your employees, we have a simple breakdown for you.

Know Your Retirement Plan Options

Generally, there are four types of retirement plans to consider: 401(k), Traditional IRA, Roth IRA, and myRA. The main differences between the plans (as demonstrated in the table below) include:

  • Contribution limits
  • Eligibility
  • Ease of implementation

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Of those options, the 401(k) is the only company-sponsored plan and allows for the highest contributions.

An IRA may be opened by individuals regardless of their employment statuses, and is often used as an option by those who do not have access to a company-sponsored plan because they are either unemployed, self-employed, or employed by a company without a 401(k).

401(k)s and Traditional IRAs enjoy tax-deferred growth, meaning you pay taxes when you withdraw assets (when you retire); Roth and myRAs however are taxed before you make contributions (but you won't pay taxes on withdrawals while in retirement).

The Benefits of a 401(k) (as opposed to a Traditional IRA, Roth IRA, or myRA)

Some people erroneously think that, without a match, there is no point to contributing to a 401(k). However, there are many benefits to a 401(k), even without employers matching contributions.

  • Pretax deductions: The deductions taken from your paycheck to go toward your 401(k) is pretax money, so your contributions essentially lower your taxable income at the end of the year.
  • Compound interest: The money you invest compounds every year (tax-free!) until you are ready to retire. As this Business Insider chart demonstrates, the earlier you start saving for retirement, the more potential you have to gain in compound interest.
  • Easy for both workers and employers: Contributing to your 401(k) is a painless process to maintain once you've established your plan. In addition, Captain401 allows you the option of effortlessly managing your 401(k) online. For employers, enrollment, contributions, and compliance are completely streamlined or automated, making the onboarding and administration seamless for all parties.

And of course, for employees of companies offering matching contributions, there are many advantages to having "free money" added into their retirement plans.

Employer Tax Benefits for Retirement Plans

There are also significant tax benefits for employers that come with sponsoring 401(k) plans. For one, the company's match contributions are deductible on the employer’s federal income tax return. In addition, companies with fewer than 100 employees are eligible for a $500 annual tax credit up to $1,500 to offset the startup costs of a new 401(k) plan for the first three years.

Fundamentally, the government wants to offer incentives and tax breaks so employers and employees can protect their financial futures. As a matter of fact, the term 401(k) is actually just an IRS tax code.

We're here to help you navigate this process. Learn more about how you can get started on the path toward a paperless, hassle-free 401(k) on our website at http://captain401.com.

Image credit: US Department of Agriculture

If you want to set up or switch to an a 401(k) that's great for employees and employers, let your company know about Captain401.