![](https://financeblvd.com/wp-content/uploads/2023/06/Pixabay-Pexels-1000x600.jpg)
401(k) vs. IRA: What’s the Difference?
![](https://financeblvd.com/wp-content/uploads/2023/06/Pixabay-Pexels-1000x600.jpg)
Regarding retirement planning, two popular options often come up in discussions are the 401(k) and the IRA. These retirement savings accounts offer tax advantages and the opportunity to grow your money over time. However, there are significant differences between the two. Explore the differences between a 401(k) and an IRA to help you decide which option is best below.
![](https://financeblvd.com/wp-content/uploads/2023/06/Kaiser-iStock.jpg)
Kaiser/ iStock | A 401(k) plan is a tax-advantaged retirement account offered by many employers
Employer-Sponsored vs. Individual Account
One of the primary distinctions between a 401(k) and an IRA is how they are established. A 401(k) is an employer-sponsored retirement plan. It is typically offered by companies to their employees as a benefit. Contributions to a 401(k) are made through payroll deductions, and the funds are invested based on the options provided by the plan.
On the other hand, an IRA (Individual Retirement Account) is established and managed by an individual. It is not tied to an employer and can be opened with a financial institution such as a bank or brokerage firm. Individuals make contributions to an IRA directly through regular contributions or lump-sum deposits.
Contribution Limits
Another significant difference between a 401(k) and an IRA is the contribution limits. 401(k) plans generally allow for higher contribution limits than IRAs. As of 2021, the maximum annual contribution limit for a 401(k) is $19,500 for individuals under 50. However, individuals aged 50 and above can make additional catch-up contributions of up to $6,500, bringing their total limit to $26,000.
![](https://financeblvd.com/wp-content/uploads/2023/06/Contribution-Collection-and-Compliance.jpg)
Kaiser/ iStock | The biggest mistake you can make with your retirement savings is not saving at al
For IRAs, the maximum annual contribution limit is lower. In 2021, for instance, individuals under 50 could contribute up to $6,000 per year. Those aged 50 and above can make catch-up contributions of up to $1,000, totaling $7,000. It’s important to note that these contribution limits may change over time, so checking the current limits is always advisable.
Employer Matching Contributions
One of the significant advantages of a 401(k) plan is the potential for employer-matching contributions. Many employers offer a matching program, where they contribute a certain percentage of the employee’s salary into their 401(k) account. The specific matching formula can vary between companies, but the employer will match a portion of the employee’s contributions up to a certain limit.
With an IRA, there are no employer-matching contributions. The entire contribution is made by the individual without any additional contributions from the employer.
Investment Options
401(k) plans typically offer limited investment options chosen by the employer or plan administrator. These options include mutual funds, target-date funds, and sometimes company stock. The investment options within a 401(k) are curated to provide a diversified selection while aligning with the plan’s investment objectives.
![](https://financeblvd.com/wp-content/uploads/2023/06/AOA-Shutterstock-e1687206104104.jpg)
AOA/ Shutterstock | Save when you don’t need it, and it’ll be there for you when you do
On the other hand, an IRA offers a broader range of investment options. Individuals have more control over their investments and can choose from a wider array of stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other investment vehicles. This flexibility allows individuals to customize their investment strategy to match their risk tolerance and financial goals.
Portability
Portability refers to transferring or rolling over funds from one retirement account to another. In this aspect, IRAs have an advantage. When leaving a job, individuals can roll their 401(k) funds into an IRA, providing more control and flexibility over their retirement savings. It allows for consolidating retirement accounts from different employers into a single account, making it easier to manage and monitor.
However, it’s important to note that if an individual changes jobs and wants to transfer funds from a 401(k) to an IRA, they may be subject to certain eligibility criteria and potential tax implications. Before making any decisions, consulting with a financial advisor or tax professional is recommended.
More in Financial Adviser
-
How to Lock In a ‘Good’ APR on Your Personal Loans?
When it comes to borrowing, understanding the intricacies of the Annual Percentage Rate (APR) can feel like deciphering a secret code....
March 13, 2024 -
How to Find the Best Personal Loan With Easy Monthly Payments in 2024
A personal loan is an amount of money borrowed from a financial institution, which you pay back in regular monthly payments...
March 8, 2024 -
Why Italy Tops the List for Solo Adventurers
Forget the guidebooks and ditch the group tours. If your soul craves an adventure that’s uniquely yours, then pack your bags...
March 3, 2024 -
From Talking Cars to AI: The Latest Car Tech at CES
Imagine having a chatty companion on your next road trip. One that tells jokes, remembers your preferences, and even helps plan...
February 24, 2024 -
Know the Pros & Cons of Personal Loans Before Applying!
Are you eyeing a personal loan, perhaps to consolidate debt, finance a home renovation, or cover an unexpected expense? Before you...
February 17, 2024 -
What Are Some Major Benefits of a Business Bank Account & How to Open One?
A business bank account is not just a fancy accessory. It is a necessity. Imagine your business as a high-performance vehicle....
February 7, 2024 -
Navigating the Ties Between Love, Living Together, and Financial Security in Retirement
Picture this: you’re nearing retirement, a time for relaxation and enjoying the fruits of your life’s hard work. But here’s a...
January 29, 2024 -
Top 5 Superyachts of 2022
In a world where social distancing became the buzzword, the allure of superyachts took on an even more glittering appeal in...
January 23, 2024 -
Mark Cuban’s Proven Tips for Business Success
Dive into the dynamic world of entrepreneurship with the maverick mind of Mark Cuban, a serial entrepreneur whose $4.6 billion fortune...
January 20, 2024
You must be logged in to post a comment Login