What is the Difference between an IRA and a 401(k)?
Both the IRA (Individual Retirement Account) and the 401k are ways to save money for retirement, or occasionally for major purchases such as the college education of a child or a down payment on a house. The principle difference between the two is that 401ks are retirement saving plans offered through your employer, and the IRA is a plan you set up on your own, with the help of a bank, mutual funds or other financial agency. Some people have no option for savings but to open an IRA. If a person is self-employed, owns a business or freelances, he or she may not have access to opening a 401k. You generally need to be employed by a company that offers a 401k savings plan to have one. There are some differences between the IRA and the 401k. Some people have both because of one of the major differences between the plans. A 401k may have a maximum savings amount or a maximum percentage of your salary that you can place in an account. You might be limited to a 10% contribution of your salary,
The main differences are contribution limits, tax deductibility, plus the abilities to take out a loan from the plan, or make an outright withdrawal. Contribution limits for IRAs are typically much lower than for 401(k)s; see www.irs.gov/individuals/index.html for the latest contribution limits and rules. Contributions to an IRA are usually deductible but contributions to a Roth IRA or 401(k) are not. Depending on your company’s rules, you may be able to borrow from your 401(k). Borrowing from your IRA is not allowed. With certain exceptions for medical, higher education and other payments, IRA withdrawals before the age of 59½ are taxable at 10 percent of the taxable amount you take out. Withdrawals from 401(k) accounts are only available in very limited circumstances while you are still employed. A withdrawal before age 59½ from your 401(k) will be subject to penalty tax, and fewer exceptions to the penalty are available. I’m self-employed – what are my retirement options? You have s
