Key Differences Between a 401k and IRA

When compared to a 401k, an IRA investment has many similarities. Both of these investment tools are great for saving for retirement. Each of them has benefits and drawbacks, depending on your individual situation. If you are trying to decide between a 401k and an IRA for your retirement account, here are a few key things that you should consider:


The biggest difference between an IRA and 401k is their relative availability to investors. Not just anyone can get a 401k if they want one. In order to obtain a 401k, you have to work for an employer that offers them. Therefore, not even all employees can get them. If your employer does not offer one, you are out of luck. Even if you work for an employer that has a plan, you might not be eligible for it. Many companies require that you work at the company for a certain period of time before you are able to contribute to this type of fund.

With an IRA, anyone that wants to invest can get one. You can set one up with a variety of financial institutions across the country. Most banks will have access to an IRA program for you if you want to find one. You fill out some paperwork and it's ready to go. There is usually no waiting period involved and many large banks offer these products.

Contribution Maximums

Another key difference between 401k's and IRA's is the amount that you can contribute to them during a calendar year. In many cases, you can invest up to three times more when you use a 401k each year, as compared to an IRA. Therefore, if you plan on contributing a big percentage of your income into a retirement account each year, a 401k may be the way to go if they are available to you.

With an IRA, you may be able to contribute up to $5000 each year. The only exception to this is when you are over the age of 50 and you can contribute up to $6000 per year. 

Match Program

With a 401k program, your employer may elect to contribute to your account as well. In many cases, they will contribute 50% of what you put into your account up to a certain maximum. Therefore, if you put in 2%, they will put in 1%. You will get free money with this type of program into your retirement account. With IRA's, there is no feature like this. You are the only one putting money into your account because it is not set up through an employer.


Another key difference between IRA's and 401k's is the amount of investment options that you have. With IRA's, you will be presented with many more options than you will with a 401k. With 401k's you usually have a few funds to pick from that are preselected by your plan provider. With IRA's you can invest in almost anything including: stocks, bonds, mutual funds, foreign exchange, futures, options, and real estate. If you like to move your investments around frequently, IRA's have a decided advantage over 401k's; you can move them as much as you want with IRA's, while you can only move your funds three or four times per year with a 401k.

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