Comparing and Contrasting Annuities, IRAs, and 401(k)s

By Susan Landis-Steward , last updated September 18, 2011

As the baby boom nears retirement age, all those investment terms like annuity, 401(k), and IRA suddenly take on more importance. You may have one of these through your employer, or you may have yet to start saving for retirement. If you're not going to get a traditional defined benefit pension, and very few are these days, you need to start thinking about your own options. So what's the best difference between the three?

An IRA, or individual retirement account, is a plan you set up for yourself with a bank or brokerage. You have some control over the investments in your IRA portfolio, and can choose between a traditional IRA where the money is deposited before taxes and you pay taxes when you withdraw the money in retirement and a Roth IRA which works in reverse. You make contributions after you pay taxes and receive your retirement funds tax free. You can contribute up to $5000 a year to your IRA and can contribute an additional $1000 per year once you are 50.

A 401(k) is an employer sponsored retirement fund and many employers make matching contributions on a percentage of your contributions. This is essentially free money and can give your a nice retirement if you stick around long enough. The 401(k) make contributions out of your paycheck, and your employer may match some of that. There is often a limit to how much an employer will match and this may affect your decision to just put all your money into the 401(k), up to a limit of $16,500 per year, or invest some in an IRA or annuity as well. If you leave your employer before retirement, you can roll the money in your 401(k) over into the retirement account of your choice. Two popular options are the IRA and annuities.

Annuities are an investment opportunity designed to pay you a steady monthly payment in retirement. There are many ways to structure annuities, including options to make payments for life to you or your spouse. Other options are to pay for a fixed amount of time, regardless of how long you live. The payments can be fixed or variable. With a variable plan, you are able to take advantage of strong returns when the fund you invest in does well and still have regular payments if the plan is doing as well.

With annuities and IRAs, you get greater control over the investments in the portfolio. You can choose funds that invest in stocks, bonds, and even real estate if you structure your investments right. With a 401(k), your employer has control over how your money is invested. Spending some time with an investment specialist who knows all the details of all three options can help you maximize your returns in retirement and make sure your investments are doing what you want them to do.

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