Skip to main content

Matthew Greene 

What is the Difference Between a 401(k) and an IRA?

July 14, 2020

When it comes down to retirement, there are numerous plans and types of retirement paths to follow. Depending on your employer, your retirement options might be between two of the most common plans: a 401(k) and an IRA (Individual Retirement Account).

 

401(k)

A 401(k) is likely the most common and well-known retirement plan option. A 401(k)-retirement plan allows for your contributions to be taken directly from your paycheck, pre-tax. The main difference between a 401(k) and an IRA is that a 401(k) is sponsored by your employer; an IRA is not. This way, there is less to do on your part when it comes to contributing to your retirement savings account. Depending on who you are employed by, your employer might offer a program matching your contribution up to a certain limit. With a 401(k), you are able to choose different funds and stocks to invest – in with the money you work hardest for. Here is a summarized list of the benefits of a 401(k)-retirement plan:

  • Employer match, if offered.
     
  • High annual contribution limit.
     
  • Contributions lower taxable income in the year they are made.
     
  • Eligibility is not limited by income.
     
  • Funds in a 401(k) may be less expensive than identical fund purchased outside of 401(k).

(Source: NerdWallet)

 

IRA

An IRA is an option best-suited for people that work for a company that does not offer any type of retirement plan. An IRA (Individual Retirement Account) is useful if you are looking to invest in “mutual funds, stocks, bonds, and ETFs. They also allow you the opportunity to grow the value of your account income tax-deferred,” (Voya).  An IRA must be opened in a brokerage or in a bank. Typically, IRAs have more options than a 401(k) when it comes to what you want to invest in. However, with a 401(k), you are able to contribute more. Here is a list of the benefits of having an IRA:

Traditional:

  • Large investment selection.
     
  • If deductible, contributions reduce taxable income in the year they are made.

(Source: NerdWallet)

 

With an IRA, there is a traditional IRA and a Roth IRA. The difference between the two is the time frame of when you get a tax break. To learn more about this in depth, we would be happy to explain this to you.

Roth:

  • Large investment selection.
     
  • Qualified withdrawals in retirement are tax-free.
     
  • Contributions can be withdrawn at any time.
     
  • No required minimum distributions in retirement.

(Source: NerdWallet)

 

If you are looking into the different types of retirement plans, check out our other blog! We break down some of the most popular types here. We would love to help you plan out your retirement. Give us a call at (985) 237-4033 to get started!

 

Sources:

 

https://www.nerdwallet.com/article/investing/ira-vs-401k-retirement-accounts

 

https://voya.com/articles/best-retirement-plan