Differences Between IRA & Non-IRA Accounts

Retirement accounts allow you to reliably save for the future.
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Planning for retirement should be a top priority for everyone, and a wide variety of retirement plans are available. Among the most popular are individual retirement accounts, 401(k) plans, and 403(b) plans. Understanding the differences between your options will allow you to invest your money where it will do you the most good. By basing your decision on your risk tolerance, your age, and even the health of the economy, you will formulate a portfolio that is designed to meet your needs. Each plan has specific Internal Revenue Service guidelines, so it is wise to investigate the benefits and costs of each.

Overview of Various Retirement Accounts

A traditional IRA is opened with, and managed by, an IRA custodian. This can be any bank, brokerage firm, credit union or other financial institution. Traditional IRAs can only be funded with cash. Stocks, bonds, and property are not accepted unless they have been rolled over from another account. Contributions are generally "tax-deferred," meaning the money is not subject to income tax until withdrawn from the IRA. Contributions may also be made after taxes.

A 401(k) is established by an employer on behalf of its employees. Contributions are typically tax-deferred cash wages and represent a percentage of the employee's income, but employers can contribute to their employees' 401(k) plans. Employees may also may after-tax contributions so long as they do not surpass contribution limits.

A 403(b) is a tax-deferred retirement savings plan established for public service employees by their employers. It is also known as a tax-sheltered annuity plan (TSA). Contributions to an employee's 403(b) plan are based on her wages and are taken as tax-deferred income. Employers may make contributions to their employee's accounts. Just as with a 401(k), contributions may also be made after taxes, providing they do not surpass contribution limits.

Contribution Limits

An IRA's maximum annual contribution limit for the 2013 tax year is $5,500. A catch-up provision of $1,000 is offered to IRA holders age 50 and older.

Both 401(k) and 403(b) plans have a maximum annual contribution limit of $17,500 for 2013. For employees 50 and over the catch-up contribution limit is $5,500.

Potential Growth Rates

Growth of IRA funds depends how the portfolio is diversified and managed. It can have aggressive, moderate or conservative management. Greater diversification options give traditional IRAs the potential to generate larger growth than other plans.

In general, 401(k) and 403(b) plans have limited investment options. However, because the employer can contribute to employee's accounts, earning principal is increased at no risk to the account holder.

Distribution of Funds

Distribution of funds is similar for all three plans. IRA, 401(k), and 403(b) funds are distributed penalty-free after the account holder reaches age 59 1/2, with mandatory distributions beginning at age 70 1/2. Withdrawals prior to 59 1/2 are subject to a 10 percent penalty. Tax-deferred contributions are subject to income tax upon withdrawal, while after-tax contributions are not. With all three types of accounts, the early withdrawal penalty of 10 percent can be avoided in some hardship cases.

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