What's the difference between a pre-tax 401(k) and traditional IRA?

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 Contributions made are tax deferred and not counted toward your taxable income until withdrawn from your account. Contributions made are tax deductible and not counted toward your taxable income until withdrawn from your account.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.

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