When it comes to retirement plans, IRAs and 401(k)s provide many of the same benefits. But in certain situations, an IRA can outperform a 401(k). IRAs aren’t right for everyone, so you should become familiar with the advantages IRAs have over 401(k)s before you transfer funds or set up a new account. To help you do this, here are a few benefits you can reap from an IRA not available in a 401(k).
1. Qualified Charitable Distributions (QCDs)
IRAs allow you to take QCDs and send them directly to the charity without including the distribution amount in your taxable income. This often results in a lower tax bill. You can also use your QCDs to offset your required minimum distribution.
2. Penalty-Free Distribution for Higher Education
A 401(k) distribution for higher education expenses will incur both a tax and a penalty. Taking an early IRA distribution to pay for higher education expenses for you or certain family members is penalty-free.
3. Freedom from Distribution Restrictions
Opportunities for early distributions of 401(k)s are limited at best. Subject to the plan administrator’s rules as well as the tax code, 401(k)s require a compelling reason such as a hardship, to receive an early distribution. Conversely, IRA distributions are restriction free. You can take an IRA distribution at any time and do not need an approved reason like 401(k)s.
4. Aggregate Required Minimum Distributions (RMDs) From Multiple Accounts
If you have multiple IRAs, you can aggregate the RMDs for your accounts and then take that amount out of one or any combination of your IRAs. Doing this with your 401(k)s results in steep penalties.
5. No Withholding
You can opt-out of tax withholding from an IRA distribution but not with a 401(k) distribution. This is a great benefit for those who end up with little or no tax liability at the end of the year.
6. Self Direction
One of the best parts of having an IRA, instead of a 401k, is that you have the most flexibility in how your IRA assets are invested, whereas with a 401k, your investment options are limited to those provided by the 401k Administrator. With an IRA, you can move your entire retirement account into a self-directed IRA account and then invest the money anywhere you want, including in real estate and start-ups. Yes, it’s true! You get to choose.
Deciding whether to maintain your retirement account as an IRA or a 401k is a critical decision, and requires that you understand the benefits and limitations of both.
This article is a service of the Law Office of Keoni Souza, LLC, an estate planning law firm in Honolulu, Hawaii. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Family Wealth Planning Session, ™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by contacting our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.
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