Traditional IRA Limits & Comparison

If your employer is currently matching all of your 401 (k) contributions then by all means stick with them. This however does not mean that you should not consider the traditional IRA. The traditional IRA is an amazing investment tool that I have discussed here in the past and plan on elaborating on further in the near future.

IRA Contribution Limits For 2010

All individuals under the age of 50 are allowed to contribute a maximum of $5,000 to their traditional IRA account in 2010. $5,000 a year but may a lot of extra income to put towards your income and it will require you to dig deep with your finances. For some it is extremely difficult to squeeze an extra $5,000 of of their respective budget, so you should try to match your maximum IRA contribution by as much as possible. If you are over 50 years old then the IRS allows you to deposit an additional $1,000 towards your traditional IRA retirement account.

Traditional IRA Compared To 401(k)

I have already compare the traditional IRA to the 401(k) in the past but there can never be too many comparisons when deciding on your retirement investment tool. If you leave your employer after you turn 55 years old then you are eligible to take all of your 401(k) retirement contributions with you without an penalties attached to it. Once you cover the taxes on the 401(k) there will not be an additional penalties.

You have the opportunity borrow money from your traditional IRA account whenever you may need it for a major purchase (home, wedding) or for an emergency situation (break down, medical bills). The traditional IRA offers a penalty-free $10,000 withdrawal for the first time you decide you make a home purchase. There is to penalty to this IRA withdrawal but there is taxes that you will of course have to pay. What exactly is a “new home?” According to the IRS it means that you have either never owned a home or been the sole owner of your main residence for the last two years. The best part of this penalty-free withdrawal is that you can use it to help a relative (child, grandchild, etc.). Another penalty-free IRA withdrawal applies when you take money to pay for an education (once again either for yourself or for a family member.)

The IRA also has much lower costs associated with it than a 4o1(k) retirement plan. Due to the fact that the IRA has very few restrictions on investment vehicles you are able to investment in many low costs index funds. For those of you that are curious- index fund fees can be as low as less than 1% which is nothing compare to the exorbitant fees that may come with some 401(k) investments. The 401(k) costs are not only expensive but also can very confusing for the average person. You have to take care of both management fees and the individual investments fees that come along with it.