IRA vs. 401(k): What's the difference?
If you’re eligible, it’s possible you could contribute to a 401(k) and a traditional and Roth IRA, so it may be helpful to know how they compare from a contribution, withdrawal and tax perspective. Here’s a look at their similarities and differences.
A 401(k) is a type of employer-sponsored retirement plan. Depending on the industry you work in, your employer-sponsored retirement plan may be called a 403(b) or 457.
An IRA is an individual retirement account that you open with a financial institution, either a bank or a brokerage firm. Types of IRAs available include traditional IRAs, Roth IRAs and even options for self-employed individuals and small business owners.
There’s a difference in how you fund 401(k)s and traditional/Roth IRAs, as well as the investment options available to you.
Traditional and Roth IRAs
401(k)s and traditional IRAs have more in common when it comes to tax benefits, distribution and withdrawal requirements. They’re considered tax-advantaged investment accounts, since contributions are either pre-tax or tax-deductible.
A Roth IRA is considered a tax-free investment account, since distributions and qualified withdrawals aren’t taxed.
401(k)s + traditional IRAs
Diversifying your investments can lower your taxes now and into retirement. Learn more in this guide to tax diversification and investing.