Kevin Canterbury, through his work as a wealth management advisor, realizes that many clients have questions regarding their retirement accounts. Whether it be through an IRA or a 401(k), people want to be sure that their assets are protected and can properly facilitate their transition into retirement. Kevin recognizes that, despite the many similarities between IRA and 401(k) accounts, there are key differences that separate the two. Depending on certain factors, these differences may play a role in which type of account is preferable for your needs either prior or leading into retirement. Here, Kevin Canterbury of Arizona explores some key features of an IRA that are different than 401(k) accounts.

You Can Make a Qualified Charitable Distribution

One large difference between an IRA and a 401(k) is that IRA owners and IRA beneficiaries 70 ½ or older can send up to $100,000 from their IRA account to charity without needing to include any of the amount in their income through qualified charitable donations. You will not get a charitable deduction if you make a qualified charitable distribution; however, by never adding that income to your tax return, the results are often still lower in a tax bill than if you had taken a normal IRA distribution and made a regular charitable contribution. A QCD can also offset either a portion or all of your required minimum distribution. You would not be able to make a qualified QCD from any other employer-sponsored plan such as a 401(k) or 403(b), meaning that an IRA could be a stronger option if you plan to use retirement funds for charitable purposes.

You Can Avoid Withholding

Paying your taxes is a requirement, but it many do not know that it is possible to have a low tax bill after all of your exemptions, deductions, and credits are applied. It is also possible that you have withholding from other sources. In these instances, there is no need to have further amounts withheld from your retirement account districutions0- as it would essentially be giving the government a tax-free loan. Kevin Canterbury of Arizona notes that, with an IRA, you can avoid this because you can opt-out entirely of withholding. With a 401(k), distributions eligible for rollover are subject to a 20% mandatory withholding- with no option to opt-out.

You Can Take a Penalty-Free Distribution for Higher Education Expenses

Distributions that are taken from a retirement account before the person is 59 ½ are subject to both income tax and a 10% early distribution penalty. Kevin Canterbury of Arizona acknowledges that there are exceptions, however. For example, if you or certain family members need money from your IRA for higher education expenses such as tuition, books, supplies, etc., you can. For individuals that want to go back to school or have family that are looking to further their education, an IRA can allow them to take a distribution penalty-free. This is not the case with a 401(k), where you will be subjected to a major tax bill.

You Can Take a Distribution When You Want

If something happens that necessitates pulling from your 401(k) prior to retirement, you are at the mercy of both your plan’s rules and the Tax Code when attempting to access your money. If you are under the age of 59 ½, you may only have limited options for accessing- whereupon you may be able to take a loan from your 401(k) or take a hardship distribution. Kevin Canterbury acknowledges that this is not that case with an IRA, where you can usually take a distribution whenever you need it. It is important to remember that, despite their being no restrictions, you will still need to pay income tax and a penalty- but if you have no other choice, the option exists to access your funds.