What Is the Difference Between an IRA and a 401K?

IRAs and 401ks are two ways to save for retirement in which the retirement age determined by the IRS for nonpenalized withdrawals is 59 1/2 years. The key differences between IRAs and 401k plans can be determined by reviewing how the plan originates, who the trustee is and how much control the investor has over investment options.

Employer Plan Vs. Self-Directed

A 401k plan is an employer-sponsored plan that allows a person to contribute a percentage of pretax income. An IRA is an account opened by the individual that allows up to $5,000 to be contributed annually.

Taxes

Both 401k plans and Traditional IRAs contribute pretax money with distributions added to adjusted gross income; early withdrawals can be additionally taxed at 10 percent. A Roth IRA will allow post-tax contributions with no deduction to grow tax-free until retirement.

Control

A 401k plan is run by a trustee for the company with investment options limited to what the company trustee offers. An IRA (Traditional or Roth) allows an investor to work with the unlimited investment options provided by banks, brokerage firms and insurance companies.

401k Additions

Employers may match employee contributions in a 401k plan, whereas employers don't have access to IRAs at all. When an employee leaves the company, he has the option to roll over the 401k into a self-directed IRA.

Simple IRA

A Simple IRA is hybrid between an IRA and 401k in which an employer funds an employee IRA. Employees generally do not contribute to these IRAs.

Using Both

A person can have both an IRA and 401k plan to maximize savings toward retirement. To be covered by a plan at work and to qualify for a deduction, a single person must make less than $65,000, and a married couple must make less than $109,000.

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