What is the difference between a 401(k) and an IRA?

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by montana , in category: Retirement Planning , 10 months ago

What is the difference between a 401(k) and an IRA?

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2 answers

by issac.schaden , 10 months ago

@montana 

The main difference between a 401(k) and an IRA lies in their origins and eligibility criteria.

  1. Origin: A 401(k) is an employer-sponsored retirement plan offered by private companies, while an IRA (Individual Retirement Account) is a personal retirement account that an individual can open with a financial institution.
  2. Contribution Limits: In terms of contribution limits, a 401(k) generally allows for higher contribution amounts. As of 2021, the annual contribution limit for a 401(k) is $19,500 (with an additional $6,500 catch-up contribution for individuals aged 50 and older). Whereas, with an IRA, the contribution limit is $6,000 per year ($7,000 for individuals aged 50 and older).
  3. Employer Matching: 401(k) plans often offer employer matching contributions, where the employer matches a certain percentage of the employee's contribution, which can significantly enhance an individual's retirement savings. IRAs, on the other hand, do not provide employer matching contributions.
  4. Investment Options: Typically, 401(k) plans offer a limited number of investment options chosen by the employer, such as mutual funds or target-date funds. In contrast, IRAs provide a broader range of investment choices, including stocks, bonds, mutual funds, ETFs, and more.
  5. Portability: When an individual changes jobs, they often have the option to roll over their 401(k) into an IRA or transfer it to the new employer's 401(k) plan. IRAs, being personally owned, provide more portability and flexibility, allowing individuals to maintain their accounts regardless of job changes.
  6. Required Minimum Distributions (RMDs): Starting at the age of 72 (previously 70.5 before the SECURE Act), individuals with traditional IRAs are required to start taking withdrawals called Required Minimum Distributions (RMDs). In contrast, if an individual is still working, they may delay RMDs from their employer-sponsored 401(k) plan until retirement, subject to certain conditions.


It's worth noting that there are different types of IRAs (Traditional IRA, Roth IRA, SEP IRA, etc.) with varying tax advantages, eligibility criteria, and withdrawal rules. It is advisable to consult with a financial advisor or tax professional to determine the best retirement savings strategy based on individual circumstances.

Member

by alan , 6 months ago

@montana 

The main differences between a 401(k) and an IRA can be summarized as follows:

  • Origin: A 401(k) is an employer-sponsored retirement plan, while an IRA is a personal retirement account that individuals can open themselves.
  • Contribution limits: 401(k) plans generally allow for higher annual contribution limits compared to IRAs.
  • Employer matching: 401(k) plans often offer employer matching contributions, while IRAs do not.
  • Investment options: 401(k) plans typically offer a limited range of investment options chosen by the employer, while IRAs provide a broader selection of investment choices.
  • Portability: IRAs are more portable and flexible than 401(k) plans, allowing individuals to maintain their accounts regardless of job changes.
  • Required Minimum Distributions (RMDs): Traditional IRAs require individuals to start taking RMDs at age 72, while individuals may delay RMDs from a 401(k) plan if still working.


These are some of the key differences between a 401(k) and an IRA. It's important for individuals to carefully consider their financial goals and circumstances before deciding which retirement savings option is best for them.