401(k) Versus IRA: What's The Difference?

401(k) Versus IRA: What’s The Difference?

by Jul 26, 2018

When trying to decide what the best option for a retirement savings account is, many people end up comparing 401(k) versus IRA accounts. While this is a common comparison to perform, there are actually many reasons why it’s a good idea to have both types of accounts, rather than choosing just one.

What Is A 401(k) Plan?

A 401(k) plan is what’s known as an employer-sponsored retirement plan. They are often one of the safest, easiest, and (if you’re really lucky) generous types of retirement accounts available. 401(k) plans are offered primarily through businesses to their employees, and often include some kind of matching contribution program.

All contributions to a 401(k) are pre-tax money, which means an employee doesn’t pay tax on that money while it’s in their account. Taxes are paid when the money is withdrawn during retirement. The current maximum annual contribution to a 401(k) plan is $18,500.

What Is An IRA?

IRA stands for Individual Retirement Account, and anyone under the age of 70 can open one and make contributions. Similar to a 401(k) account, IRAs offer a tax-deferred way to save money before retirement.

The annual contribution limit for an IRA is much lower though, it currently stands at $5,500 for those under fifty years of age. However, some IRAs allow for tax-deductible contributions for those who are not also participating in an employer-sponsored retirement plan.

401(k) Versus IRA Accounts

The primary differences between 401(k) versus IRA accounts are how they’re offered and the annual contribution limits. 401(k) plans are almost exclusively provided through an employer, while IRAs are available to anyone.

The annual contribution limits for 401(k) plans are also much higher than an IRA. However, 401(k) plans are not always easily transferable from one employer to another, which can be problematic for those who change employers semi-frequently.

Using An IRA And 401(k) Together

Rather than trying to choose a 401(k) versus IRA account for your retirement planning, the best option, if possible, is to use both together. Maxing out the contributions to each account means the ability to save $24,000 of tax deferred income every year, which is a huge advantage for retirement.

To learn more about 401(k) versus IRA accounts, or to get some help setting up a retirement plan that will meet your needs, please contact us. We’re happy to discuss what options are available and help create a financial plan crafted to fit your unique situation.