What are the differences between a 401K and an IRA?

401(k), IRAs
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A 401(k) is an employer-sponsored retirement plan and an IRA is an Individual Retirement Account. Your IRA is yours; it does not change no matter where you work. A 401(k) has to stay with the employer. It can be rolled over to most 401(k)s or into an IRA but a 401(k) is employer specific, unlike an IRA.

As far as tax benefits and restrictions, they are similar. For traditional 401(k)s and IRAs, money goes is pre-tax and qualified distributions come out taxed as ordinary income with similar age restrictions. Other differences/similarities:

- IRAs have income restrictions, 401(k)s do not

- 401(k)s can have loan provisions, IRAs do not

- An employer can contribute to a 401(k), not an IRA

- Both have Roth options

- IRAs can invest in most anything (including real estate), 401(k)s are more restrictive

If you can, having both is an awesome option. My blog has a series on small-business, employer-sponsored plans that might be helpful:


Mark Struthers CFA, CFP®

January 2017
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