Four ways a 401(k) and an IRA are the same, and six ways they are different. There are many ways to save for retirement, but many people turn to two main types of retirement plans: 401(k) plans and IRAs. Here’s a rundown of the similarities and differences.
Knowing (and understanding) all the retirement terms can be overwhelming. What’s the best place to start? The basics.
When it comes to retirement accounts, it’s all about addressing the differences (and similarities) between the most common types of retirement plans: employer-sponsored plans (401(k)s and 403(b)s) and individual retirement accounts (IRAs).
Four ways 401(k), 403(b) and IRA plans are the same
| Purpose | Investment accounts that can help you save for retirement |
| Contributions | Continuous or one-time |
| Tax benefits | Both reduce taxable income [401(k)s and 403(b)s through payroll deductions and IRAs through potential tax deductions] |
| Tax obligations | Applicable state and federal income taxes must be paid upon reaching the minimum withdrawal age. |
Six Ways 401(k)/403(b) Plans and IRAs Are Different
| Differences | 401(k) and 403(b) plans | IRA Accounts |
| Access | You create it, and it is yours, regardless of where you work. | You create it and it is yours, regardless of where you work. |
| Investment options available | The employer usually chooses them; they may be limited | I could have more investment options |
| Employer’s complementary contribution | The employer may make a matching contribution up to a certain percentage of your contribution. | There is no additional employer contribution. |
| Transfers | A transfer may be required when you stop working for the employee (see below) | Allows transfer of funds from former employer plans or other IRA accounts into a single IRA (known as consolidation). |
| Tax deductions | No tax deduction | It may be deductible, depending on your spouse’s retirement plan access and your income. |
| When you leave a job | You can roll over your 401(k) plan savings to an IRA or to a 401(k) plan with another employer (if available). | No effect; the IRA account belongs to you and remains with you, regardless of your employment. |
Two reasons to invest in a 401(k) or 403(b)
- You may have access to one at your workplace.
- Your employer may offer to match up to a percentage of your contributions.
Three reasons to invest in an IRA account
- You don’t have access to a 401(k) plan, or you want to save more money beyond what you’re saving through your employer.
- You work independently and want to save periodically for retirement.
- You want to consolidate multiple retirement savings accounts.
Finally, remember: a traditional IRA is not the same as a Roth IRA. Yes, you can have a 401(k), an IRA, and a Roth IRA.
What is retirement income, and how do you create a plan to generate your own?
By establishing a retirement income from a variety of sources, you can help ensure that you can fund your lifestyle when you stop working.
We earn income while we work, but when we retire, the word “income” includes more than just a paycheck. In fact, “income” in retirement refers to all the funds you’ve earned, withdrawn, or received as a benefit and that you have available to pay your expenses during retirement.
It may be a mistake to wait until closer to or during retirement to consider your possible sources of retirement income. In fact, the sooner you educate yourself on all of your retirement income options, the sooner you can choose and plan what best suits your financial goals.
What are the main types of retirement income?
A solid retirement income portfolio is typically made up of a variety of sources. The ideal mix gives you funds that are diversified (some tied to the market, some not), reliable (you know how much each one will bring you each month), and long-term (they will last you a lifetime).
Retirement income sources often fall into two main groups: guaranteed and non-guaranteed. Guaranteed sources of retirement income include Social Security, a pension, and annuities. Retirement savings accounts, such as 401(k)s and IRAs, additional savings and investments, and other sources of income comprise non-guaranteed sources of retirement income.
What is guaranteed income during retirement?
In simple terms, a guaranteed source of retirement income is one that provides you with the same amount each month. It’s not tied to the market (so it doesn’t go up or down), and because the total amount is reliable, you can count on it to pay fixed expenses like utilities or housing. Most retirement income sources also provide benefits throughout your life, so you can count on them throughout your retirement.
What is non-guaranteed income during retirement?
Non-guaranteed sources of retirement income typically come from accounts that may continue to maintain their growth potential, often because they are tied to the market. Examples include traditional savings accounts or funds in a 401(k) plan. Growth potential has the ability to help you pay for additional retirement expenses that your guaranteed income may not cover (travel, for example) and also possibly help offset inflation.
