Are you confused about the difference between a 401(k) and an IRA? In this video, we break down the key differences between these two retirement accounts, so you can make informed decisions about your retirement savings….(read more)

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When it comes to saving for retirement, you have a lot of options. Two popular choices are the 401(k) and the IRA. While both these plans offer tax benefits and are a great way to build long-term savings, they do have some key differences. In this article, we’ll explore 401(k) vs. IRA: What’s the Difference?

First, let’s start with the basics. A 401(k) is a retirement savings plan that’s offered by your employer. The plan allows you to contribute a portion of your pre-tax income to your account, up to certain contribution limits. Your employer may also make contributions to your account, either in the form of matching funds or profit-sharing.

An IRA, on the other hand, is an individual retirement account. This means you set up the account yourself, independent of any employer. Like a 401(k), you can contribute pre-tax dollars to an IRA up to certain contribution limits. However, your employer doesn’t contribute to this account.

Now let’s get into some of the key differences between the two plans.

1. Contribution Limits

The contribution limits for 401(k)s and IRAs are different. In 2021, the contribution limit for a 401(k) is $19,500, with an additional $6,500 catch-up contribution if you’re age 50 or older. For an IRA, the contribution limit is $6,000, with an additional $1,000 catch-up contribution if you’re age 50 or older.

2. Employer Contributions

As mentioned earlier, employers can contribute to 401(k) plans, either through matching funds or profit-sharing. This means you may be able to build your retirement savings faster with a 401(k) than an IRA.

3. Investment Choices

The investment choices available in a 401(k) are limited to what your employer offers. In contrast, IRAs have a lot more flexibility when it comes to investment choices. With an IRA, you can invest in stocks, bonds, mutual funds, and more.

4. Fees

401(k)s often come with fees, including administrative fees and investment fees. IRAs also have fees, but they’re usually lower. If you’re trying to choose between the two plans, be sure to research the fees associated with each one.

5. Withdrawal Rules

The rules for withdrawing money from a 401(k) and an IRA are different. With a 401(k), you can start taking penalty-free withdrawals at age 59 ½. With an IRA, you can also start taking penalty-free withdrawals at age 59 ½, but you must pay taxes on the amount you withdraw. If you take money out of an IRA before age 59 ½, you may be subject to a 10% penalty.

In conclusion, both 401(k)s and IRAs are excellent options for saving for retirement. Choosing the right plan for you depends on your individual financial situation and goals. Be sure to weigh the pros and cons of each plan before making a decision.