Difference Between IRA vs 401 (k)
IRA stands for Individual Retirement Accounts, which is used as a retirement savings tool. Investment in IRA for retirement savings comes with a tax-saving advantage. There are mainly three types of IRA, i.e. Traditional IRA, Roth IRA, and Rollover IRA. IRA can be opened with financial institutions by either individuals or businessmen for retirement savings with taxation benefits.
401 (k), similar to IRA, is also a retirement saving plan with a taxation advantage. 401 (k) plan shall be sponsored and established by the employer wherein the employer has the option to contribute to the 401 (k) account. In addition, employers offering the 401 (k) may choose to offer matching contributions or any other contribution to the 401 (k) account.
IRA vs 401 (k) are very frequently used and common retirement saving options with taxation advantage. Both IRA vs 401 (k) can be used by either individuals and businessmen. The employees or businessmen can choose to use one or both the tools IRA vs 401 (k) for their retirement savings plan.
Head To Head Comparison Between IRA vs 401 (k) (Infographics)
Below is the top 8 difference between IRA vs 401 (k)
Key Differences Between IRA vs 401 (k)
Both IRA vs 401 (k) are popular choices in the market; let us discuss some of the major Difference Between IRA vs 401 (k)
- IRA vs 401 (k) both are frequently used and common retirement saving options with taxation advantage. Both can be used by individuals and businessmen. One may choose to use either IRA or IRA and 401 (k) both for their retirement savings plan.
- IRA can be opened by individuals and doesn’t have any linkage with an employer. However, 401 (k) shall be established and sponsored by the employer.
- There is no employer contribution to the IRA. However, an employer may choose to offer a matching contribution or any other contribution in the 401 (k) account in a 401 (k) plan.
- Individuals or Businessmen with income can contribute to the age of 70.5 Years in IRA. However, one must be working for a Company/Employer to be eligible for participation in the 401 (k) plan and meet the Employer’s eligibility criteria.
- The contribution limits in 401 (k) are significantly higher than the ones in IRA plans.
- The cost involved in maintaining the 401 (k) plans for retirement saving is higher than the IRA.
- IRA is more flexible in terms of withdrawal of savings from the retirement plan in comparison to 401 (k).
- The withdrawals in IRA vs 401 (k) are taxed at 10% as early distribution tax if the account holder’s age is less than 59.5 Years during the withdrawal year.
- IRA has relatively much higher investment options than a 401 (k) plan.
IRA vs 401 (k) Comparison Table
Below is the 8 topmost comparison between IRA vs 401 (k)
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| S No. | Particulars | Individual Retirement Account (IRA) | 401 (k) Plan |
| 1 | Definition | IRA is a retirement savings tool with a tax-saving advantage that both individuals and businessmen can use. | 401(k) is also a retirement saving tool with tax benefits that are sponsored and established by an employer. |
| 2 | Employer Contribution | Not applicable in IRA as it is not linked to the employer. | An employer may choose to offer a matching contribution equivalent to an employee contribution or any other contribution in the 401 (k) plan. |
| 3 | Eligibility for Retirement Plans | Individuals or Businessmen with income can contribute to the age of 70.5 Years. However, if someone uses both the tools IRA vs 401 (k), there is a limitation on income for the tax deduction. | One must be working for a Company/Employer to be eligible for participation in a 401 (k) plan and meet the Employer’s eligibility criteria. |
| 4 | The contribution limit in the Retirement Plans | The total contribution limit in IRA is capped at $6500, which includes $5500 of regular contribution and $1000 of additional catch-up contribution for those who are more than 50 Years old.
The contribution limit under IRA is much lesser than a 401 (k) plan. |
The total contribution limit in the 401 (k) plan is capped for the employee at $24500, which includes $18500 of regular contribution and $6000 of additional catch-up contribution for those who are more than 50 Years old.
The total contribution limit for employees and employers both combined is capped at $55000. |
| 5 | Cost Associated with Retirement Plans | The cost of opening the IRA, putting money under individual retirement accounts, and managing them is much lesser than 401 (k) plans. | The cost involved in maintaining the 401 (k) plans for retirement saving is higher than the IRA. |
| 6 | Withdrawal from the Retirement Plans | The employee or businessmen owning the retirement account may choose to withdraw the savings from the retirement account at any point in time. There is no such limitation for withdrawal from the retirement savings account. | Under the 401 (k) plan, the employee should reach certain withdrawal events as per the plan’s rules to be eligible to withdraw the savings from the 401 (k) plan. Generally, employees are allowed to withdraw savings once they stop working with the employer or reach 59.5 Years or an employee suffering from any critical illness, etc. |
| 7 | Tax on withdrawals for Retirement Plans | Savings under the IRA is subject to the applicability of income tax on the amount of money withdrawn from the IRA in that respective year of withdrawal. Such withdrawal amount is taxed at 10% as early distribution tax if the age of the account holder is less than 59.5 Years during the withdrawal year. | In the 401 (k) plan, the employee contribution, employer contribution, and withdrawals from the 401 (k) plan in the year of withdrawal are subject to the applicable income tax. The withdrawals are taxed at 10% as early distribution tax if the age of the account holder is less than 59.5 Years during the withdrawal year. |
| 8 | Availability of Investment Options | IRA has much more investment options than a 401 (k) plan as it is more like a regular brokerage account. | 401 (k), when compared with the IRA, has limited investment options. However, there are few 401 (k) plans which come up with an option of operating the account as a regular brokerage account having multiple investment options. |
Conclusion
Individual retirement accounts and 401 (k) plan both are very popular retirement savings plans in use. Both IRA vs 401 (k) comes with tax-saving advantage with different contribution limits, availability of investment options, the cost associated, and withdrawal options. 401 (k) differs in multiple ways from the IRA, with a key difference of 401 (k) being an employer-sponsored plan. 401 (k) scores higher in terms of contribution limit being significantly higher than IRA and cost of maintaining the plan being lower than IRA. However, IRA has significantly higher investment options and thereby provides higher flexibility in comparison to 401 (k). Individuals or businessmen can use both IRA vs 401 (k) plans to optimize their retirement savings.
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