Both a 401(k) and an individual retirement account can be used to save for retirement. If you want to set aside funds for the future, but aren’t sure which option to choose, it can be helpful to understand the pros and cons of each type of retirement account.
You’ll only be able to access a 401(k) if it is available through your employer. Some companies also require their employees to work for a certain period of time, such as a number of months or a year, before gaining eligibility for this type of account. “A 401(k) plan, also known as a defined contribution plan, allows employees to contribute a percentage of their salary to a company-sponsored plan,” says Mike Piershale, president of Piershale Financial Group in Barrington, Illinois.
With a 401(k), contributions are usually made through payroll deductions. This means you can have an amount taken out of each paycheck and set aside in the account. In addition, some companies offer to contribute to 401(k) plans on behalf of eligible employees. One common type of employer contribution is a 401(k) match, and the amount you receive will depend on company policies. “A matching contribution will typically be between 2% and 10% of the employee’s income and will be contingent upon a certain level of participation by the employee,” says Rob Drury, executive director of the Association of Christian Financial Advisors in San Antonio, Texas.
