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What's the Difference Between an IRA and a 401k?

What's the Difference Between an IRA and a 401k?

One of the most common questions I get from readers is, "What's the difference between an IRA and 401(K)?"

If you're an athlete, 401(k) sounds like it should be the length of some torturous marathon. Of course, IRA might evoke images of the Irish Republican Army. I suggest you ignore your immediate word associations and begin thinking about your future immediately. Retirement as a goal really is like a long, slow marathon, and a well mapped out plan makes finishing on your feet a real possibility. I have graphed out the differences between IRAs and 401(k) accounts below. Here's to the long haul!

Name of plan Purpose Who can invest IRS Contribution Limit for 2009 Taxes
401(k) Tax-deferred retirement savings account offered by many employers. If your employer offers it, you may be eligible. Check your employer’s plan for requirements. $16,500 (plus up to $5,000 more if you are 50 or more). Your Employer’s Plan rules may also further limit your contributions. Deferred until retirement; taxes paid when funds are withdrawn.
Roth 401(k) After-tax retirement savings account. If your employer offers it, you’re eligible. Check with your employer’s plan for requirements. $16,500 Contributions are made with after tax dollars; qualifying withdrawals aren’t subject to income tax.

See the difference between a traditional IRA and a Roth IRA when you


Name of plan Purpose Who can invest IRS Contribution Limit for 2009 Taxes
Traditional IRA Individual retirement savings account. Anyone with earned income and under age 70.5 for the year in which the contribution is made 100% of earned income or $5000 ($6000 if you are over 50), whichever is less. Contributions may be tax-deductible depending on several factors. Withdrawals of income and pretax contributions after age 59.5 are taxed as regular income.
Roth IRA Individual retirement savings account. Available to single-filers making an income up to $116,000 or married couples filing jointly making a combined maximum of $169,000 annually. If you are married filing separately, talk to your tax adviser for income limits 100% of earned income or $5,000 (or $6,000 if you are over age 50) whichever is less. Contributions are made after taxes. Withdrawals of income aren’t subject to income tax if all conditions are met. For example, your withdrawal of income won’t be taxed if at least 5 years has passed since your first Roth contribution and you are at least 59.5 years old.


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aimeeb aimeeb 7 years
syako syako 7 years
bellaressa bellaressa 7 years
Syako, was your IRA through work or an individual b/c there is a difference?
kscincotta kscincotta 7 years
Thanks for the helpful post!
miss-malone miss-malone 7 years
Good to know :)
syako syako 7 years
Just a note, I was trying to set up a Roth IRA a few years ago and had to have $2,500 initially to sign up. Don't know if this is the case always, but just a heads up for people who are considering it.
Antioxidant Antioxidant 7 years
Thank you! Was just discussing the same stuff with my bf yesterday since we want to start saving for retirement. It can be so overwhelming and even the way he explained it left me a little lost. This helps though.
mscc mscc 7 years
Thanks for posting the brief and easy-to-understand rundown.
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