IRA vs. 401(k): What's the difference?

Know your retirement saving options and how to select the account that’s the best fit for you.

Tags: Investing, Planning, Retirement
Published: March 05, 2020

Here are the main differences between the three most common types of retirement investment accounts – a 401(k), traditional IRA and Roth IRA.

Self-employed? Here are additional tax-qualified retirement plan options.

 

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Plan

401(k)s

Traditional IRAs

Roth IRAs

Definition

 

An employer-sponsored retirement plan. You contribute a percentage of income, and your employer often matches a portion of it. Contributions are then invested.

An individual retirement account that you set up with a financial institution. Contributions are then invested.

 

Contribution details

 

Contributions are directly withdrawn from your paycheck with pre-tax dollars.

Funded with after-tax dollars. Some IRA providers allow for direct deductions from your paycheck.

Contribution limit

 

$19,500 per year (you can add an extra $6,500 if you’re 50 or older).

 

$6,000 per year ($7,000 if you’re 50 or older).

Employer match details

 

Varies by employer, with average match of 4.7%.1

None.

 

Investments selection

The investment portfolio is generally chosen by your employer, but you may have the option to change from the default fund.

 

You can choose what goes into your portfolio.

 

 

 

Plan

401(k)s

Traditional IRAs

Roth IRAs

Tax penalties for early withdrawal

10% additional tax if withdrawn before age 59 ½, but certain exceptions may apply to your situation.

If you are younger than 59 ½, you can avoid the 10% early withdrawal penalty for certain qualifying exceptions, such as first-time homebuyer, college and medical expenses.

 

If you are younger than 59 ½, you can withdraw up to $10,000 penalty-free to pay for qualified first-time home-buyer expenses, provided at least five tax years have passed since your initial contribution. Other exceptions may apply to your situation.

Required withdrawals

After you reach age 72, you are required to withdraw a certain amount each year, calculated based on your age and the value of your accounts.

 

No withdrawals required.

Tax implications

 

Pre-tax contributions and taxed withdrawals.

 

Tax-deductible contributions (funded with after-tax dollars) and taxed withdrawals.*

 

Non-deductible contributions (funded with after-tax dollars) and tax-free withdrawals.

 

         

 

Which plan is best for my needs?

401(k)s

Consider this option if your employer offers a company match. If your employer does not offer a company match, you may get more out of your contributions with an IRA.

Traditional IRAs

If your priority is to lower your taxable income, a traditional IRA can help with that. If you contribute up to $6,000 ($7,000 if you’re 50 or older) in deductible contributions, your taxable income may be lowered by that amount.*

Roth IRAs

If flexibility is a priority, a Roth IRA might be best for you. With tax-free withdrawals in retirement, no required withdrawals and the ability to withdraw your contributions at any time, Roth IRAs make cashing out easy. 

 

1 "This Is the Average 401(k) Company Match. How Does Yours Stack Up?," Money.
*After a certain income level, there is no tax deduction for the contribution.
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How you plan for retirement should change as you age. Read “Saving for retirement: A complete checklist” for tips on planning from your 20s on.