Table of Contents
What is a 401k?
What is an individual retirement account (IRA)?
401k vs. IRA: What are the main differences?
What to consider when deciding a 401(k) and IRA
Can you have both an IRA and a 401k?
The bottom line
Sep 12, 2022
9 min read
There are some important distinctions between 401(k)s and IRAs, that investors consider to learn how each account type would impact their retirement savings strategy.
Properly funding a future retirement is no passive feat. It requires commitment to a savings strategy over many years, and can involve a number of different investment approaches. To aid in those efforts, there are a few different tax-advantaged savings accounts available to investors today.
Two of the most common are the 401(k) and the IRA, both of which offer certain benefits to investors that can make those retirement savings goals more attainable. Here’s a look at the rules associated with each type of account, their limitations, and how to choose the most suitable one.
A 401(k) is an employer-sponsored retirement savings plan. It allows employees to direct a portion of their earnings into the account and defer paying income tax on it until they withdraw it in retirement. These dollars can then be invested into any number of funds chosen by the account sponsor (their employer). Contributions are automatically deducted from employees’ paychecks, at whatever rate the employee selects.
With a traditional 401(k) plan, contributions are made with pretax dollars. Any qualifying funds contributed to a 401(k) plan throughout the year can be deducted, reducing one’s total taxable income for that year. There are also Roth 401(k)s—which are funded with after-tax dollars and may be withdrawn tax-free—but not all employers offer one.
Employers may also choose to match some or all of their employees’ contributions to their 401(k), in what is known as an employer match.
When an employee leaves the company, they can choose to rollover their 401(k) funds into a new employer’s 401(k) or into an individual retirement account (IRA).
401(k) plans entail several key benefits for investors.
With a traditional 401(k), investors can deduct contributions from their taxable income that year. With a Roth 401(k), investors make contributions with after-tax dollars and make tax-free withdrawals in retirement.
Employees usually elect how much money they want to defer from their salary to a 401(k) once during the calendar year. Once the amount is set, the savings are allocated from their paycheck to their retirement account automatically.
Some 401(k) plans allow for loans against the account balance prior to retirement. While the loan will need to be repaid and incurs both interest and fees, this can offer another safety net for account owners who need to access the funds earlier than age 59½.
Some employers offer to match contributions to 401(k) accounts. So every time an investor contributes to their account, their employer may match some or all of those dollars, up to a maximum amount each year. Every dollar an employer matches is free money toward retirement.
The specifications of a 401(k) plan is determined by the employer, which can create downsides or limitations for the employee.
An employer can set eligibility requirements for participation in their 401(k) plan. These can be based on how long an individual has worked for the company, how many hours a year they work, and even their age.
The employer may not offer to match contributions, or if they do, might subject them to a vesting schedule.
Employees must also choose between the funds offered by their employer, and these investment options may come with high fees.
For 2022, eligible employees can contribute up to $22,500 toward their 401(k) savings plan. If they’re over 50, a catch-up contribution of $6,500 is allowed, bringing the total maximum contribution to $29,000.
If a workplace offers a 401(k), the company’s benefits coordinator can explain their investment options and help set up the account. Self-employed individuals can opt for a Solo 401(k) for themselves or both them and their spouse. Opening a Solo 401(k) can be done through most online brokerages.
Another retirement savings plan option is the individual retirement account, or IRA. An IRA can come in a few different varieties, offering tax advantages either at contribution or at distribution. These accounts are available through a variety of financial institutions including banks, credit unions, and online brokerages.
A traditional IRA is a tax-deferred retirement savings vehicle. Contributions are made with pretax funds, similar to a 401(k). When distributions are taken in retirement, they are taxed as ordinary income.
Distributions cannot be taken before age 59½ without triggering taxes and a 10% penalty. Required minimum distributions for traditional IRAs also begin at age 72. If an investor fails to take these distributions, there is a penalty equal to 50% of the undistributed amount.
The maximum annual contribution to a traditional IRA is $6,000 for 2022 (or $7,000 for those 50 or older). Tax-deductible contributions are allowed up to that maximum, but begin to phase out depending on one’s AGI for the year.
With a Roth IRA, contributions are made with after-tax dollars, but when distributions are taken out in retirement, they are tax-free (including any growth).
Since Roth IRA contributions are made with taxed dollars, the contributions can be withdrawn at any time without penalty. Withdrawing gains, however, will trigger both taxes and a 10% early withdrawal penalty fee if they’re taken prior to age 59½ or less than five years after the account was opened. There are no RMDs with a Roth IRA as long as the account owner is alive.
, the maximum contribution to a Roth IRA is currently limited to $6,000 per year ($7,000 if over age 50).
A simplified employee pension IRA, or SEP IRA, is for small business owners, their employees, or self-employed individuals. Contributions are made with pretax dollars, so distributions in retirement are taxed as ordinary income.
Maximum annual contributions are currently the greater of $61,000 or 25% of one’s annual compensation. Withdrawals can be taken as early as 59½ without penalty, and RMDs are required starting at age 72.
IRAs offer individuals the ability to save for retirement in a tax-advantaged account that’s not tied to an employer.
An IRA offers tax advantages to future retirees either at the time of contribution or when it’s time to take distributions from the account, depending on the type of IRA.
Account holders can also choose their investments. Since traditional and Roth IRAs aren’t managed by employers, account owners can choose the institution and specific securities or assets, be they mutual funds, exchange-traded funds, stocks, or bonds. IRAs can even be used to invest in real estate.
Investors should be aware of the stipulations and limitations of IRAs before investing.
In 2022, employees can contribute as much as $6,000 per year into a traditional or Roth IRA. For those ages 50 and older, a catch-up contribution of $1,000 is allowed, bringing the maximum to $7,000. The exception is the SEP IRA, which allows for up to $61,000 in annual contributions.
Once these contributions are made, the money is essentially locked away until retirement. There are exceptions, but they’re tied to true necessity. IRAs do not allow loans like 401(k)s.
Some IRAs also set maximum income limits for eligibility. Those who surpass certain thresholds either cannot contribute or deduct their contributions at tax time.
Only some types of IRAs—like an SEP—allow for employer contributions. In most cases, only the employee can contribute to their IRA, which limits employer matching.
An IRA can be opened at many different banks, credit unions, and brokerages including online platforms and robo-advisors.
Once an individual has chosen where to open an IRA, they’ll need to provide personal information like their name, date of birth, address, and Social Security number. They may also need to provide a copy of a government-issued ID like their passport or state driver’s license as well as their phone number or email address.
The individual will need to choose the type of IRA they want to open and name a beneficiary. The institution will want to know how they plan to fund the account and make contributions (including amounts). If funding with another bank account, the individual will be asked to link these accounts.
Rolling funds from another IRA or 401(k) will require additional paperwork.
Try Titan’s free 401(k) Calculator to see how much your 401(k) will give you in retirement.Learn More
So, what’s the difference between a 401(k) and an IRA? Here are some of the biggest:
When determining whether to open and contribute to an IRA or a 401(k), there are a few questions to consider. Here are some to start:
Traditional and Roth IRAs have lower contribution limits than 401(k)s.
If an employer offers to match 401(k) contributions, that’s free money for retirement savings.
With a traditional IRA, an investor pays income tax on their retirement funds when they’re withdrawn. The tax rate is based on their total income in retirement, which could be higher, lower, or the same as the year in which they contributed the funds. With a Roth IRA, an investor pays income tax, at their current tax rate, on the funds in the year they’re contributed. They withdraw them tax-free in retirement.
Investors can contribute to both types of accounts throughout the year and both can play an important role in their retirement savings strategy. The amount an investor can contribute to an IRA and/or deduct from their taxes may be governed by income limits, especially if they also participate in a workplace retirement savings plan like a 401(k).
Both IRAs and 401(k)s have tax benefits and drawbacks for future retirees. There are some important distinctions to make between the two account types, so investors can consider their options and how each account type would impact their retirement savings strategy. Those who can’t decide can hold and contribute to both types of accounts at the same time.
At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.
Get started today.
Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.
You might also like
Are 401(k) Contributions Tax Deductible?
By making elective deferral contributions to a 401(k) plan, employees will reduce their current taxable income and withholding without having to take a tax deduction.
What Is a Solo 401(k)? Retirement Account For the Self-Employed
A solo 401(k), also called a self-employed 401(k) is a tax-advantaged retirement plan with high contribution limits made available for self-employed individuals.
How to Set Up a 401(k) for Small Business Owners
A 401(k) can help a small employer attract and retain workers, while potential tax credits and deductions can defray some of the costs of setting up such a plan.
What Is a 401(k) Plan?
A 401(k) is a retirement savings vehicle offered by many employers. It offers tax advantages and investment opportunities and has higher contribution limits than other retirement accounts.
© Copyright 2023 Titan Global Capital Management USA LLC. All Rights Reserved.
Please refer to Titan's Program Brochure for important additional information. Certain investments are not suitable for all investors. Before investing, you should consider your investment objectives and any fees charged by Titan. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested, including principal. Brokerage services are provided to Titan Clients by Titan Global Technologies LLC and Apex Clearing Corporation, both registered broker-dealers and members of FINRA/SIPC. For more information, visit our disclosures page. You may check the background of these firms by visiting FINRA's BrokerCheck.
Various Registered Investment Company products (“Third Party Funds”) offered by third party fund families and investment companies are made available on the platform. Some of these Third Party Funds are offered through Titan Global Technologies LLC. Other Third Party Funds are offered to advisory clients by Titan. Before investing in such Third Party Funds you should consult the specific supplemental information available for each product. Please refer to Titan's Program Brochure for important additional information. Certain Third Party Funds that are available on Titan’s platform are interval funds. Investments in interval funds are highly speculative and subject to a lack of liquidity that is generally available in other types of investments. Actual investment return and principal value is likely to fluctuate and may depreciate in value when redeemed. Liquidity and distributions are not guaranteed, and are subject to availability at the discretion of the Third Party Fund.
The cash sweep program is made available in coordination with Apex Clearing Corporation through Titan Global Technologies LLC. Please visit www.titan.com/legal for applicable terms and conditions and important disclosures.
Cryptocurrency advisory services are provided by Titan. Cryptocurrency trading is provided by Bakkt Crypto Solutions LLC ("Bakkt Crypto"). Bakkt Crypto is not a registered broker-dealer or a member of SIPC or FINRA. Cryptocurrencies are not securities and are not FDIC or SIPC insured. Bakkt Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. Cryptocurrency execution services are provided by Bakkt Crypto (NMLS ID 1828849) through a software licensing agreement between Bakkt Crypto and Titan. Please ensure that you fully understand the risks involved before trading: bakkt.com/disclosures.
Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice.
Contact Titan at email@example.com. 508 LaGuardia Place NY, NY 10012.