Retirement planning is crucial for financial security. Understanding the difference between 401(k)s and IRAs helps you make the right choice for your situation.
What is a 401(k)?
A 401(k) is an employer-sponsored retirement plan. Many employers offer matching contributions, which is essentially free money. You should contribute at least enough to get the full match.
401(k) Features:
- • Employer matching (typically 3-6%)
- • Higher contribution limits ($23,500 in 2024)
- • Automatic payroll deductions
- • Tax-deferred growth
- • Required minimum distributions at 73
What is an IRA?
An IRA is an individual retirement account you open independently. There are two types: Traditional (tax-deductible) and Roth (tax-free growth). Choose based on your current and expected future tax situation.
IRA Features:
- • Lower contribution limits ($7,000 in 2024)
- • More investment control
- • No employer involvement needed
- • Roth has tax-free withdrawals
- • Income limits apply to Roth
Which Should You Choose?
If your employer offers a match, contribute enough to get it. Then max out an IRA. If you still have money, contribute more to your 401(k). Diversify across both account types when possible.