Don’t know the difference between a 401(k) and an IRA? Don’t worry; you’re not alone! IRAs and 401(k)s are both types of retirement savings accounts – the key difference being that a 401(k) is sponsored by an employer, while an IRA can be opened by just about anyone. This chart outlines some of the other key characteristics:
|Who can open an account?||Employees who meet the eligibility requirements of their employer-sponsored plans.||Anyone who has earned income for that year and is under the age of 70½.|
|Who contributes to the account?||You (and possibly your employer if they offer a match or profit sharing).||You ( and/or your spouse, under certain circumstances).|
|How does it affect my income taxes?||The amount contributed doesn’t count toward taxable income in the year contributed, so you'll immediately benefit from deferred income taxes.||It may be eligible to deduct the contributed amount from your taxable income (depends
on the type of IRA and if you meet certain qualifications), meaning you'll pay less income
tax for the year.
|Does money come straight from my paycheck?||Yes. 401(k)s use automatic enrollment.||No. You’re responsible for transferring your own funds to your account.|
|What's the maximum I can contribute?||$19,500 for 2020; an additional $6,500 if you're over 50 years old.||$6,000 for 2020; an additional $1,000 if you're over 50 years old.|
|Do my earnings grow tax-deferred?||Yes||Yes|
|When I retire and start receiving distributions, how are they taxed?||The amount is taxed as ordinary income.||The amount is taxed as ordinary income.|
|Are there income limitations?||No. Anyone can contribute to their 401(k), regardless of how much money they make.||Yes. If you are covered by a retirement plan at work, please see this IRS chart for 2020 limitations. If you aren’t covered by a retirement plan, please see this chart.|
|What protection or insurance do I have?||Complete protection against
bankruptcy and creditors.
|Some bankruptcy protection. Some or no creditor protection (depending on the state).|