Are IRAs And 401(k)s The Same Thing?

Investing is very confusing when you are just starting out and you need to learn about so many different things. 

We have talked about both IRAs and 401(k)s in the past but if you haven’t read these articles yet maybe do so before continuing. 

401(k) article 

IRA article

You have been warned and if you are still here then let’s continue with this article, shall we? 

So both  IRAs and 401(k)s are retirement savings accounts. And both of them offers you tax breaks as an incentive to sock away money for your future. 

However the 01(k)s are available only through an employer. And the IRAs can be set up by any individual who has earned income.

It’s important that you know that 401(k)s have higher annual contribution limits than IRAs. As of 2020 the 401(k)s had the annual contribution limits on $19,500 but the IRAs had $6,000. 

The catch-up contribution limits are also beefier in workplace plans. Which means that if you are older than 50 years of age the 401(k) will allow you to save an additional amount which wont be bigger than $1,000.

Contributions to a 401(k)s must be made by December 31st in order to qualify for the current tax year. But when it comes to the IRAs then the date is somewhere in April of the following year.

There are some 401(k)s which has a vesting period where the employees have to wait a certain period of time before they’re allowed to participate in the plan. But when it comes to IRA, you have to know that they don’t have vesting period. 

Investment offerings in a 401(k) are pretty much determined by the plan administrator. But the IRAs they have much broader choices. This means that if you choose to open an account at a specific discount brokerage you can pick from mutual funds, exchange-traded funds (ETFs), stocks and more.

Don’t worry you don’t have to choose between one of them. Because the IRS allows savers to contribute to both an IRA and a 401(k) at the same time. So if you have hard time choosing one, then maybe go with both. 

401(k) are provided by employers as I said above somewhere, and if at any point you leave the company you work for then don’t worry. Because you can take the money with you and roll it over into an IRA. 


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