IRA vs. 401k vs. Roth: Your Guide to Retirement   

An IRA, 401k, and Roth all have their respective pros and cons, but what is the difference of IRA vs. 401k vs. Roth? When it comes to retirement, it’s important to know what’s best for you.

Working towards a stable retirement is an incredibly difficult task, especially today. It takes a lot of careful planning, financial frugality, and long-term foresight. However, what any retirement plan needs the most is the right beginning. If you begin working and planning for a stable retirement in your 20s, chances are good that you will have the means to retire comfortably.

But how you decide to contribute to your retirement account (and seek contributions to it from other sources) will heavily affect the restrictions and limitations you will encounter while saving for retirement.

There are countless different ways to structure your retirement as you work towards the final years of your time in the labor force. But by far, the three most common ways to plan around retirement involve either an IRA, a Roth IRA, or a 401(k).

But, when it comes to IRA vs. 401k vs. Roth – what is the difference?


IRA vs. 401k vs. Roth

IRAs, or individual retirement accounts, are retirement accounts you can establish yourself to save up and grow your cash at a steady rate to fight inflation and have enough to settle down after retirement.

401(k), on the other hand, is an employer-offered retirement plan, one set up and financed by money withheld by your boss. A 401(k) is also known as a defined contribution plan.

A Roth IRA is an individual retirement account with the simple but important distinction that it allows you to withdraw your money tax-free. There are a few other important distinctions between a traditional IRA and a Roth IRA that would enable the latter to make these tax-free withdrawals.

There are a few other significant differences between an IRA vs. 401k vs. Roth account, as well as other similar retirement plans. Choosing the right one depends on individual circumstances and opportunities, tax considerations, financial difficulties that may lie ahead, financial responsibilities, and more.


What is an IRA?

An individual retirement account is a type of account you can open with a financial institution for the purpose of saving money over multiple decades to work towards a stable retirement. An IRA allows a person to enjoy tax-free growth on their account and deduct the contributions they make to their retirement account from their individual tax return.

Retirement accounts are more than just a shoebox under the bed. They are an investment account wherein you are given multiple investment options to grow your money at low risk, usually through certain funds, stocks, bonds, or property. These investments help you grow your retirement money and beat inflation, versus simply letting the cash sit in a savings account and barely grow.

While the money is eventually taxed when it comes out of the account at the beginning of your retirement, it will be taxed at the rate you qualify for during retirement, which tends to be lower than the rate you might have qualified for while still in the workforce.

In other words, traditional IRAs allow you to turn all of your financial contributions into tax-deferred earnings and lower the taxes you might be paying on those earnings when you finally withdraw them.

IRAs are not necessarily exclusive to other retirement plans. You can save up for both an IRA and put money into your 401(k). Of course, the more retirement plans you contribute money to, the less money you have for bills and living costs. Furthermore, there are other requirements to consider before you can start making your contributions.


What is a Roth IRA?

Roth IRA distinguishes itself from a regular or traditional IRA in that any contributions made to it are taxed first so that when you withdraw them, these contributions will be tax-free income. In other words, through a Roth IRA, you take care of the taxes upfront, so you don’t have to pay them down the road.

Furthermore, a Roth IRA allows you to let your potential earnings grow unimpeded by taxes. Even better, you can withdraw your contributions without penalties. One of the most significant differences between a Roth IRA and a traditional IRA is that early withdrawal penalties can be steep when investing in a traditional IRA.

In a traditional IRA, any withdrawals made before the age of 59 and a half incur both income taxes and a 10 percent penalty. You also have required minimum distributions (RMDs) that you must claim starting at age 72. A Roth IRA has neither an early withdrawal penalty nor any RMDs.

Both traditional and Roth IRAs have specific requirements before you can begin making contributions towards them.


What is a 401(k)?

While an IRA and a Roth IRA require you to make your contributions to your retirement account and decide between upfront tax benefits and tax benefits down the line, a 401(k) involves the employer in the equation.

401(k)s differentiate themselves from IRAs in that a portion of your wages is invested into the account and typically matched by your employer. The investment options for a 401(k) are limited in comparison to most IRAs. However, the gist is the same – put the money in an account, invest it conservatively, allow it to grow enough to avoid loss in value, and hopefully grow to a size that will support you in retirement.

The main differences aside from having multiple sources of contributions are that 401(k) plans have higher limits on contributions and may be easier to save with because the money is being directly withheld from your earnings and never reaches you to begin with, so you don’t need to actively keep yourself from spending what you earn.

You would think that this type of plan wouldn’t be available to self-employed workers, but it is.

solo 401(k) is an option for people looking for another opportunity to benefit from their business and work towards retirement, especially sole proprietors and independent consultants.


IRA vs. 401k vs. Roth IRA: Choosing Between Them

Aside from 401(k)s, IRAs, and Roth IRAs, there are SEPs403(k)s, and other retirement accounts. But when choosing between the three most popular options, you have to ask yourself which you can qualify for, whether you can get your employer to match contributions (not always offered), and whether you prefer tax-free retirement income or tax-deferred payments.


Working With a Financial Advisor

There are countless different factors that heavily weigh into deciding to invest in a retirement account. It’s difficult to recommend one over the other without taking individual factors into account.

You should consider working with a financial advisor or tax specialist when deciding what kind of retirement account to plan with in order to save up for your golden years. Your current income projected earnings and individual tax considerations all impact which retirement account best suits you.

Can Social Security be Garnished? 5 Steps If You’ve Received CP91  

The future of social security is an uncertain one, but can social security be garnished? Scroll down to find out more about social security and Notice CP91.

Of the many notices and letters the IRS issues each year, Notice CP91 is one of the more serious notices. Receiving this notice from the IRS means that you’re severely behind on tax payments, and the IRS will resort to garnishing your social security benefits. What does this mean exactly? Let’s find out.


Understanding Notice CP91

The contents of Notice CP91 describe that the addressee has 30 days from the date of the notice before the IRS will garnish (claim) 15 percent of the social security benefits of the person to whom the notice is addressed.

Why would the IRS send you this notice? Generally, it’s because:

      • You owe the IRS back taxes that you haven’t paid, and you have received other notices warning you of this.
      • You haven’t contacted the IRS or worked out any concrete steps to tackle your back taxes.
      • You have missed previous deadlines for addressing your overdue tax balance.

Notice CP91 is one of several different “last resort” options the IRS can turn to if a taxpayer continues to leave their debt unpaid. It is signaling a levy, meaning the IRS is one step away from physically claiming a percentage of your benefits in order to pay your back taxes. The IRS has the power to levy or garnish other incomes, compensations, and assets.

For example, Notice CP504 is the Notice of Intent to Levy, which means the IRS will claim an account, property, or tax refund to cover your tax debt. When receiving a Notice CP91, the IRS will garnish or claim a portion of your social security benefits.

While this is one of the final notices the IRS will send you before claiming a portion of your benefits, you do have ways to combat it.


Can Social Security Be Garnished if I Ignore Notice CP91?

If you ignore Notice CP91, your social security can be garnished. The IRS will claim 15 percent of your social security benefits each month until your tax debt is paid.

Keep in mind that if you refuse to take measures to contact the IRS or reduce your debt otherwise, you will continue to accrue interest at the quarterly rate set by the IRS.

You can reduce the interest your tax debt will accrue and halt your levies by taking the appropriate measures now before the deadline strikes.


What Do I Do Now? 5 Simple Steps to Avoid Social Security Garnishment

The last thing you want to do is nothing at all. There are a few options available to you if you have received a Notice CP91 from the IRS. You can avoid social security being garnished. Let’s go over them.

Step 1: Get Professional Help

Working with a tax professional can help you cut through the usual channels and help you navigate the bureaucracy of the IRS as quickly as possible. A tax professional will also be able to help you work through your taxes and financial details to identify the best possible way to tackle your tax debt, avoid liens and levies, and dodge further penalties and interest.

If you believe that your tax debt is a mistake or that the IRS has sent you the wrong notice and have the necessary evidence to back it up, a tax professional can also help represent you when working through the appeals process.

Step 2: Appeals

There are multiple ways to appeal a decision to levy a tax account, including through the IRS Independent Office of Appeals and the US Tax Court. You will want professional legal representation in either case and solid evidence.

The IRS is made up of humans, after all, and humans make mistakes. If the IRS sent you the wrong notice or erroneously applied a tax debt to your account, you can quickly resolve the issue through a tax professional. A tax professional can also help you relieve liens and levies while your case is being processed.

Step 3: Repayment

If your tax debt to the IRS is no mistake, then you will want to take the appropriate steps to resolve the debt as soon as possible – preferably before the deadline on your Notice CP91.

There are three common ways to do so. The first is through a payment plan. The IRS offers three payment plans:

      • Pay now
      • Pay in several lump sums (over the course of 120 days)
      • Pay in monthly installments (over the course of more than 120 days)

Each payment plan has its advantages and disadvantages, as well as different setup fees depending on the chosen payment plan and the way you set it up (setting it up online is often the cheapest approach).

Entering into a payment plan with the IRS can delay the collection process, meaning the IRS will not issue a levy on your account (as long as you aren’t late on your payments). Payment plans typically also reduce the interest accrued on your tax debt after the first few payments.

Step 4: Offer in Compromise

If you cannot afford to make monthly payments to dissolve your tax debt completely, don’t worry. You can argue for an offer in compromise. This is an option the IRS provides to low-income taxpayers who don’t have any financial means to pay their debt in time (within the statute of limitations) without meeting financial hardship.

The IRS will review your offer in compromise (OIC) alongside your financial information to determine whether your tax account is a good fit for an OIC and whether your proposed offer meets their expectations. If your offer is lowballing what you are capable of paying each month, for example, they are more likely to reject it.

Your best bet is to work with a tax professional to formulate your offer. They will help you create an offer that the IRS is more likely to accept. You can also use the IRS’s pre-qualifier tool to get a better idea of whether they might take your offer.

Note that neither a tax professional nor the IRS’s pre-qualifier tool can guarantee that your offer will be accepted.

Step 5: Halt the Collections Process

The last resort if you cannot shoulder payments to the IRS at the moment is to temporarily halt all collection actions. This option can keep the IRS from issuing a levy or even stop a levy while it’s active.

To qualify, you must prove that the IRS’s collection actions are causing financial hardship. The IRS will periodically check-in to see if your financial situation has improved before continuing collection actions.


Final Thoughts

So, can social security  be garnished? The answer is yes – the IRS can garnish social security. But there are ways to avoid it and prevent further actions against you.

Even if you are currently being levied, it’s important to remember that not all hope is lost. Work with a tax professional today to get in touch with the IRS, formulate a payment plan you can shoulder, and get back on the government’s good side.