The Difference Between a Roth IRA and a 401(k)

The Difference Between a Roth IRA and a 401(k)
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What’s Covered in this Article

Side by Side Comparison

  • An IRA (individual retirement account) is a kind of savings account that an individual can invest in for their retirement.
  • A 401(k) is also a savings account, but one that workplaces often offer to help their employees save for retirement.

Similarities

The income invested and annual growth is untaxed for both investments, but both options tax withdrawals as income. A carefully planned retirement likely involves a mix of both.

You Might Not Qualify for a 401(k)

The most important distinction between IRAs and 401(k)s is that IRAs are available to everyone of working age, whereas 401(k)s are only available to those in workplaces that offer them. Since the workplace provides 401(k)s, investors are left only with the options which the workplace provides. With IRAs, you can select from a wider range of choices based on balancing your risk tolerance with your potential for growth.

401k vs. Roth IRA

Employed? Here’s What to Look for

Many workplaces offer investment matching as an added benefit to their 401(k)s. Having your employer match your funding on investment is an obvious benefit, one that should not be ignored. It is rarely prudent to invest less than the full amount that your employer will match in your 401(k). If your employer does not offer investment matching, or you are capable of saving more than maximum that your employer agrees to match, it is worth considering investing some of those savings in an IRA. Having money in a safer 401(k) and a riskier IRA might be the best way to balance the potential for growth with the need for security.

Limitations

Both 401(k)s and IRAs have limits on the amount that can be invested in them per year. For a 401(k) the maximum annual investment is $18,500 if you are under 50 and $24,500 if you are 50 or over(this is based on the investor’s age at the end of the year). For IRAs, the limit is much lower: $5,500 for investors under 50 and $6,500 for investors 50 or over.

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