Key Differences Between IRA and 401(k) Accounts
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What is the main topic discussed in this episode?
Here's your money briefing. I'm J.R. Whelan at The Wall Street Journal in New York. IRAs and 401k retirement accounts sound like they pretty much offer the same kind of investment opportunities for putting money away. But there are actually very distinct differences that can cost you a lot of money if you don't know about them. We'll run down some of those differences in a moment. First, some money in market news you should know. The amount workers are producing per hour and their hourly compensation rose more quickly in the first half of the year than previously thought. The government says that labor costs were higher in the first two quarters mainly because hourly compensation was revised upward.
It's also a sign that U.S.
What are the basic differences between IRAs and 401(k)s?
corporation profits have begun to weaken, and that could in turn force companies to reduce spending. The latest jump in unit labor costs is part of a longer-term shift. Compared with the second quarter of 2018, costs rose 2.6%. That's well above the average annual gain of about 1% since 2000. And Harvard, MIT, and Yale top the Wall Street Journal and Times Higher Education's college rankings. The rankings emphasize how well a college prepares students for life after graduation, and the rankings are based on 15 factors, including academic environment, extracurricular engagement, career opportunities, and a return on investment. More broadly, the survey indicates that schools in the West provide more diversity, while schools in the Northeast are most likely to help students land a great job.
Check out the full set of rankings on WSJ.com and the WSJ app.
401k accounts and IRAs are both intended for consumers to set aside money for retirement. There are several other things they have in common, but also very significant differences. And not knowing them can cost you dearly. So let's bring in Wall Street Journal tax reporter Laura Saunders to spell it out for us. So Laura, with pensions all but a thing of the past, 401ks and IRAs, they're pretty much the biggest games in town.
Yes, if you're saving for retirement, that's the case. And another thing is that often there's a conduit between IRAs and 401ks. You can roll your IRA money into a 401k in some cases, and you can very often roll your 401k money into an IRA.
Yeah, a big difference between 401ks and IRAs comes down to borrowing from the accounts.
How can early withdrawals from an IRA or 401(k) affect taxes and penalties?
Well, often taking withdrawals ahead of schedule because they're retirement accounts. And so, you know, they're supposed to be for retirement. But there are these exceptions besides death and disabilities. For example, say you need a little bit of extra money to buy your first home. You can take $10,000, up to $10,000, out of an IRA. Now, you'll have to pay your tax, but you don't have to pay a pretty heavy 10% penalty. But if you take the same money out of a 401k, you'll owe both the tax and the penalty. It's these subtle differences that really trip people up.
When can you avoid the 10% early-withdrawal penalty for a first-time home purchase?
And you spoke to a couple who mistakenly, they were tripped up and they wound up paying money that they didn't want to pay as a result of that.
Yeah, it was about $600. But if you look at it another way, it raised their tax bill by 65%. And they were pretty upset about that. And, you know, these are smart people. He was training to be a doctor and she was a college math teacher. But they were advised by someone at the retirement plan manager that they wouldn't have to pay if they were buying their first home, not the penalty. Right.
And if somebody wants to tap into a retirement account to pay for higher education costs, you should pull money from your IRA.
Not your 401k.
Why might tapping an IRA be better than a 401(k) for paying education costs?
That's exactly right. Same problem there. In every case, you'll have to pay tax. But the question is, do you have to pay that 10% penalty? And in some cases, maybe if you're going back to school, you wouldn't even owe tax at all. But you still have to pay the 10% penalty if you take it from the wrong place.
Oh, okay. And it's important to either read the rules carefully or enlist someone who understands them and will give you good advice.
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Chapters
7 chapters
1
What is the main topic discussed in this episode?
0:05–0:44
2
What are the basic differences between IRAs and 401(k)s?
0:44–2:32
3
How can early withdrawals from an IRA or 401(k) affect taxes and penalties?
2:32–3:09
4
When can you avoid the 10% early-withdrawal penalty for a first-time home purchase?
3:09–3:51
5
Why might tapping an IRA be better than a 401(k) for paying education costs?
3:51–4:21
6
How do the ages 55–59½ change penalty rules for 401(k) vs IRA withdrawals?
4:21–5:23
7
When do required minimum distribution rules differ between IRAs and 401(k)s?
5:23–5:40
Speakers
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