How much investing freedom do you get in a 401K or IRA?
Posted by admin in Finance Monday, 14 November 2011 12:28 5 Comments
When you invest outside of a retirement account, the investment choices are limitless but inside one it seems that you have less choices. Is this true? What limitations come with investing in those retirement accounts? Thank you!
With an IRA, you have total freedom to pick the custodian and investments.
With a 401(k) plan, you are limited to the investment options offered by your specific plan. Plans are required by law to offer a “menu” of options, but some plans have a wider range of options than others. A few 401(k) plans even offer self-directed brokerage accounts.
There is no restriction on the investment choices in a 401K or an IRA. The only difference between a regular broker’s account (so called no restriction) and a retirement account is the tax free treatment of a 401K and IRA account. Income earned in a retirement account such as the 401K and the IRA account are tax free until it is withdrawn after the age of 59 1/2. Any amount withdrawn from the retirement account before the age of 59 1/2 is subject to a stiff 10% withdrawn penalty plus any income derived from this account in the past. For tax income implications, you need to consult with a tax CPA for any early withdraw of these retirement account.
As far as the investment choices for these accounts, you can put in CDs, market money certificates, trading of any stock, mutual funds, even othe assets and properties. As long as the IRA account you established with the custodian like a broker allows you to trade these investment tools. There is a limit on some money market accounts bearing a certain interest rate for example. There is a minimum purchase for a transaction on treasury bills for example. Other than that, I think your choice of the investment is as free as your other investment account.
You get infinitely more freedom with an IRA. You have very limited choices within a 401k. Sometimes the choices can be poor. Mostly they are limited to mutual funds. I am of the opinion (unverified) that some companies receive kickbacks for offering certain funds.
You have more freedom in investment choices in an IRA, but the annual contribution limit is far less than an IRA a 401k and you dont have the possibility of matching in an IRA. You should have both an IRA as well as your 401k to maximize retirement contributions.
Never pass up a Dollar for Dollar match, unless you work for someone like Enron