Retirement plan

401K vs. TFRA Retirement Account: What’s the Difference?

In the third quarter of 2021, over half of Americans aged 55 or older said they’ve already retired.

When preparing for retirement, it’s vital to understand your options. Two popular retirement savings vehicles are 401k plans and TFRA retirement accounts.

Are you on the fence regarding a TFRA Retirement Account? If so, read on to learn the main differences between these two types of accounts.

Retirement

A 401k Is a Common Choice for Retirement Plans

A 401k is a kind of retirement savings account. It’s offered by many employers.

This option lets employees add a part of their pre-tax income to the account. From there, it’s possible to invest the money in stocks, bonds, and mutual funds.

One significant advantage of a 401k is that the employer often matches the contributions, providing an opportunity for extra savings.

Exploring Tax-Free Benefits in a TFRA Retirement Account

A TFRA retirement account offers tax-free growth on your contributions and withdrawals during retirement. Unlike a traditional 401k, contributions to a TFRA use after-tax dollars.

Still, the benefit comes later when you can withdraw your money without worrying about taxes on the earnings.

Comparing Investment Options for Retirement Savings

Both 401k plans and TFRA retirement accounts offer investment options to encourage savings growth. In a 401k, you often have access to mutual funds your employer has chosen. These funds may vary in risk level and asset allocation.

TFRA retirement accounts also provide investment choices. The key difference is the tax treatment, with TFRA accounts offering tax-free growth compared to the tax-deferred growth of a 401k.

Understanding Contribution Limits

Both 401k plans and TFRA retirement accounts have contribution limits set by the IRS. For 2024, the annual contribution limit for a 401k is $20,500 for people under the age of 50. There’s a catch-up contribution limit of $6,500 for those 50 and older.

TFRA contribution limits vary depending on the type of account and your income level. Still, they often allow for significant contributions that can grow tax-free over time.

Accessibility and Withdrawal Rules

One important factor to consider when preparing to retire is the accessibility of your funds and the withdrawal rules.

With a traditional 401k, premature withdrawals are a possibility. Still, they’ll likely come with a 10% penalty, as well as more income taxes. Withdrawals during a financial emergency or loans for specific types of expenses could count as exceptions.

In contrast, TFRA retirement accounts offer more flexibility when it comes to accessing your funds. Since contributions have already been taxed, you can often withdraw whenever you want without paying a penalty.

Still, earnings may come with penalties and taxes if withdrawn before age 59.5. Be sure to learn how to withdraw from retirement accounts early.

Saving for Retirement Is a Cinch

It’s easier than ever to choose between a TFRA retirement account or a 401k. Once you make the decision, you can relax and enjoy your retirement to the fullest.

There’s always more to learn, which is why it’s worth saving our site. That way, you can have the latest news and tricks at your fingertips every day.

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