Whats the difference between an IRA and a 401(k)?
A 401(k) is an employer-sponsored plan. That means that it is a benefit provided by an employer to employees, and allows the employee to divert some of his salary into it. That portion will not be considered part of the employee’s taxable income. In other words, that employee earned a lower salary than he really did for the purpose of calculating taxable income. The portion of salary that got diverted into the 401(k) goes into an account that gets invested in different ways, usually into mutual funds. Those investments grow on a tax-deferred basis, meaning that the year-by-year growth of the investments is also not added to anyone’s taxable income. It only becomes taxable when it is withdrawn. Most employers will throw in a contribution to their employees’ 401(k) accounts as an added benefit, by matching employees’ contributions dollar for dollar, up to a point. An IRA has almost nothing to do with your job. It’s set up by you and no one makes the decisions about how it is invested exc
