While a 401(k) and IRA are both types of retirement savings accounts, the key difference is that a 401(k) is sponsored by an employer, while an IRA can be opened by just about anyone with earned income. You can also save a lot more for retirement with a 401(k). See some other key characteristics below:
| Pre-tax 401(k) | Traditional IRA | |
| Who can open an account? | Any 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 72. (1) |
| Who contributes to the account? | You and possibly your employer if they offer an employer match or profit sharing. | You and/or your spouse under certain circumstances. |
| How does it affect my income taxes? | Contributions made are tax deferred and not counted toward your taxable income until withdrawn from your account. | Contributions made are tax deductible and not counted toward your taxable income until withdrawn from your account. |
| Does money come straight from my paycheck? | Yes, all personal 401(k) contributions are based off of wages earned from payroll or through owner’s draws. | No, you’re responsible for depositing your own funds into your account. |
| What's the maximum I can contribute? | $19,500 for 2020 and an additional $6,500 if you're over 50 years old. | $6,000 for 2020 and 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? | You have some protection against bankruptcy and creditors. | The amount of protection you have will depend on what protection is given under state law. Some states allow creditors to reach your IRA assets. |
(1) For individuals turning aged 70.5 prior to January 1, 2020, the age is 70.5.