There are differences when it comes to annuities and 401ks, despite the fact that both are retirement savings vehicles. Annuities are issued by insurance companies; 401k plans are typically offered by mutual fund companies and overseen by third-party administrators.
Annuity Definition
Annuities are retirement accounts issued by insurance companies. They come in many shapes and sizes--fixed annuities, fixed index annuities, variable annuities and immediate annuities. The first three types are deferred annuities, and they're used in similar ways as retirement savings vehicles such as a 401k. Deferred annuities allow the owner to invest a single sum of money or regular installments on a tax-deferred basis. Money inside an annuity grows tax-deferred and can be subject to an IRA-imposed 10 percent penalty if funds are withdrawn before age 59 1/2.
401k Definition
A 401k plan is a retirement savings vehicle offered by employers to their employees. It offers the chance to save on a pre-tax or after-tax basis, with the monies coming directly out of the employee's paycheck. Some employers give an incentive to employees to contribute to the 401k plan by offering a matching program. Money inside a 401k grows tax-deferred and carries a 10 percent IRS-imposed penalty if funds are withdrawn before age 59 1/2.
Differences
Annuities are offered by insurance companies; 401ks are typically offered by mutual fund companies and sometimes have third-party administrators that oversee the plan. Variable annuities resemble a 401k plan in that the money grows based on how mutual funds perform in the overall market. Only employees of companies that offer 401k plans have access to this special retirement vehicle. Annuities are open to the general public. A 401k plan usually allows loan options, while annuities do not. Be sure to read the summary plan description (SPD) to understand how the 401k loan privilege within your plan works.
Tax Considerations
A 401k and an annuity both offer tax-deferred growth. If each vehicle is funded with pre-tax dollars, every withdrawal is subject to ordinary income tax. If funded with after-tax dollars, interest and gains earned on the contributions are subject to ordinary income tax.
Learning More
The summary plan description (SPD) is a great place to learn how your company's 401k works. For those considering an annuity, financial advisers can explain the pros and cons of investing in such vehicles. Be sure to read all policy specifics before investing any money.
Related Posts:
What Is The Difference Between A Blue Dot & Green Dot For Softballs
It can be difficult to know which ball to purchase.In sporting goods stores, one of the common ways of distinguishing between softballs is by dot color. Different terms such as gold dot, green dot...
What Is The Difference Between Acuvue 2 & Acuvue Oasys
Not all contacts are the same; the differences should be considered before buying.Acuvue 2 and Acuvue Oasys are both contact lenses that are manufactured by the company, Vistakon. Both lenses have...
Difference Between Double & Single Hung Windows
When dealing with windows, particularly when replacing old windows, you will often come across the term double-hung. It is rare to find new single-hung windows from replacement suppliers, but you...
Difference Between Sebastian Colourshine & Sebastian Laminates Cellophanes
Sebastian Professionals made many improvements in their Cellophanes hair color over the years.The product known as Sebastian Cellophanes has seen many improvements over the years, including a few...
Difference Between Kitchenaid Artisan & Epicurean
KitchenAid has produced quality mixers for almost 90 years.KitchenAid has been synonymous with quality stand mixers like Artisan and Epicurean since the 1920s, when they were sold door to door and...
