When it comes to retirement savings, two of the most popular options are 401k and IRA. While both have similarities, there are significant differences between the two that can impact which option is best for you. Here’s a breakdown of the key differences between 401k and IRA.
A 401k is a retirement savings plan sponsored by an employer.
Employee contributions are made pre-tax and may be matched by the employer.
Contributions and earnings grow tax-deferred, meaning taxes are not paid until the money is withdrawn.
The maximum contribution limit for 401k is $19,000 in 2022, with an additional catch-up contribution of $6,000 for those over age 50.
Early withdrawals from a 401k are subject to a 10% penalty and taxes, unless an exception applies.
An IRA, or individual retirement account, is a personal retirement savings plan that individuals can open and manage independently.
Contributions to a traditional IRA may be tax-deductible and grow tax-deferred, while contributions to a Roth IRA are made post-tax and grow tax-free.
The maximum contribution limit for IRAs in 2022 is $6,000, with a catch-up contribution of $1,000 for those over age 50.
Early withdrawals from a traditional IRA are subject to a 10% penalty and taxes, unless an exception applies. Withdrawals from a Roth IRA are tax and penalty-free, provided the account has been open for at least 5 years.
Both 401k and IRA can be excellent options for retirement savings, but the right choice depends on factors such as your income, contribution limits, and whether you prefer tax-deferred or tax-free growth. Consider talking to a financial advisor to determine which option is best for you.