Individual Retirement Accounts and 401Ks

Knowing the difference between IRA vs. 401k accounts is vital when you’re planning for your retirement, and in some cases it may make sense to have both.

The Difference Between IRA and 401k Retirement Accounts

Both an IRA and 401k can help you save for retirement, but they work a little differently: 

• IRA: IRA stands for Individual Retirement Account. Individuals receive tax benefits for contributing, but all IRAs have some kind of restrictions on when you may contribute, how much you may contribute, and how distributions are made. Additionally, you can choose between a Roth IRA and Traditional IRA.
• 401k: A 401k is an employer-sponsored tax-deferred retirement account, so both you and your employer can contribute. You can choose either a Traditional 401k or a Roth 401k — how contributions and withdrawals are taxed differs between them.

Which One Should You Choose?

While a 401k is offered through an employer, an IRA is usually initiated by an individual or small business. If your employer offers a 401k, you should take advantage of it, since employers often offer matched contributions. Additionally, when comparing contribution and IRA vs. 401k withdrawal rules, you’ll notice 401k annual contribution limits are much higher. 

That said, you might want to look beyond the 401k if you don’t plan on staying at your current job for long or if you don’t receive any matched contributions. A Roth IRA might be more attractive to younger professionals who are still in the lower tax brackets. If you’re already earning a substantial income, you might benefit from a Traditional IRA.

Should You Have Both?

Instead of comparing Roth IRA vs. 401k and Traditional IRA vs. 401k, you can always have both a 401k and an IRA, but keep in mind that certain limitations will apply. For instance, if you open a Traditional IRA in addition to your 401k, your ability to claim tax deductions on IRA contributions may phase out.

Get Retirement Planning Assistance at Town and Country Bank and Peoples Prosperity Bank

Saving for your retirement is serious business, which is why we recommend talking to a professional at your local Town and Country Bank or Peoples Prosperity Bank. We’ve helped residents across central Illinois with financial planning services, and we'd be delighted to help you, too.