A financial planning strategy will mostly incorporate retirement planning as one of its pillars. Social security and other workplace pension benefits may not be sufficient to meet your retirement obligations. When it comes to retirement planning, you have various alternatives, such as the employer-driven 401k account or the individual-driven IRA.


IRAs (Individual Retirement Accounts) are accounts that individuals may use to potentially earn a consistent stream of income in retirement. These IRA accounts generally offer tax advantages that may be beneficial to you in retirement planning. 


An IRA can be opened at most banks or investment firm. Your IRA assets can be invested in stocks, bonds, mutual funds, savings certificates, or index funds. Some employers also provide their workers IRA accounts.


On the other hand, a 401k plan is an employer-sponsored retirement savings account. It allows you to accumulate savings tax-free, thus reducing your taxable income. Under a 401k plan, the total employer-employee contributions are held in a single plan trust, while every employee account balance is tracked separately.


What’s the Difference Between 401k and IRA?


Both 401k and IRA are financial tools with a similar purpose of retirement planning. While employers provide a 401k plan, an IRA is usually opened by individuals. 


Comparing the various features, eligibility requirements, and withdrawal criteria can help you decide which account best suits your retirement needs. Below are the numerous ways in with these plans differ:


  1. Eligibility Criteria


Many companies provide 401Contribution Amount


In a 401k plan, you may contribute up to $19,000 if you are under 50 years of age and a further $6000 if you were above 50 in 2019. In a traditional and a Roth IRA, you can contribute $6000 combined if you are under 50 years of age and a further $1000 as a catch-up contribution if you are above 50. 


A 401k plan can also have employer matching contributions with the combined amount limit of $56,000 in 2019. As such, the 401k plan has a higher annual contribution limit.


  1. Tax Benefits


In a 401k plan, your contributions are tax-deductible. As such, your taxable income reduces for the annual year. Your contributions grow tax-deferred in a 401k and grow tax-free in a Roth plan. 

k programs to employees who have worked for them for a year or more. Contributions are capped at $62,000, with a $6000 catch-up payment for those over 50.


Individuals under the age of 70 can start their own IRA accounts. Unless you file jointly with your spouse, your contributions to a Roth IRA are restricted to your yearly gross income. 


  1. Withdrawal


401k withdrawals can be made when you reach 59, earlier withdrawls will incur a 10% penalty. In the same way, early IRA  withdrawals are taxable and subject to a 10% penalty. But in special cases, this penalty may be waived. After five years, IRA permits tax-free withdrawals without liability, especially if you fulfill specific criteria, like funding a home purchase. 


  1. Investment Options


A 401k plan has many investment options, like mutual funds and money market funds. Based on your risk profile and tolerance, you may choose to invest in a mix of options. 


Your employer’s investment options are usually outlined in the policy document. 


Disclaimer: This article is limited to providing general information about financial services and access to traditional investment-related information, general investing publications, and the like. Nothing in this article is a solicitation to transact in securities or to provide personalized investment advice. The advisor’s professional designation, certification, education, degree, or license is not a guarantee of satisfaction or results should a client engage the advisor. All investments involve risk of loss, different types of investments involve differing levels of risk, and there is no assurance that the future performance of any investment will be profitable or match any prior performance.

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