Find out what are the differences between IRA vs. 401(k) and decide which one suits you better!
Securing a healthy financial future means planning for retirement. Two of the most popular ways to save for it are IRAs and 401(k)s. But what’s the difference between an IRA vs. 401k? Well, that’s what we are going to talk about!
Learn what are their differences and decide which one suits your needs and goals better. Also, if you want to check out more financial tips on our website, you can click on this link!
IRA vs. 401k: What’s The Difference?
What Is An IRA?
An Individual Retirement Account is an account you set up on your own through a financial institution like a bank or brokerage firm. It offers tax advantages to incentivize saving for retirement. There are two main types of IRAs:
- Traditional IRA: contributions may be tax-deductible, depending on your income and whether you’re covered by a workplace retirement plan. This means you reduce your taxable income in the year you contribute. Taxes are then deferred until you withdraw the money in retirement;
- Roth IRA: contributions are made with after-tax dollars, so they don’t reduce your current taxable income. However, the beauty of a Roth IRA is that qualified withdrawals in retirement are typically tax-free.
What Is A 401(k) Plan?
It is a retirement savings plan offered by many employers. Contributions are made directly from your paycheck before taxes are taken out. This lowers your taxable income and allows your money to grow tax-deferred until you withdraw it in retirement.
- 401(k) Employer Match: a significant advantage of a 401(k) is the potential for an employer match. Many employers contribute a percentage of your contributions to your 401(k), essentially giving you free money to boost your retirement savings.
Key Differences
| IRA vs. 401k | ||
| IRA | 401(k) | |
| Eligibility | Available to anyone with taxable compensation |
Must be eligible according to your employer’s plan policies
|
| Contribution Limits | For 2023, $6,500 ($7,500 if age 50 or older) |
For 2023, $22,500 ($30,000 if age 50 or older)
|
| Employer Matching | Matching doesn’t apply |
Your employer may match (or partially match) your contributions
|
| Portability | Funds stay in your account until you withdraw them or move accounts |
Roll funds over into a new employer’s 401(k) or a rollover IRA
|
| Vesting | Funds are not subject to vesting |
May require a vesting period before funds are fully yours
|
| Early Withdrawals |
|
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Can I Have Both an IRA and a 401k?
Absolutely! In fact, having both an IRA and a 401(k) can be a powerful strategy to maximize your retirement savings. Here’s why:
- Increased Contribution Limits: by contributing to both accounts, you can save more towards your retirement than the limit for either account alone. This allows you to grow your savings faster and potentially reach your retirement goals sooner;
- Diversification: IRAs offer a wider range of investment options, allowing you to diversify your portfolio beyond the choices available in your 401(k) plan. This can help mitigate risk and improve your overall return potential.