What’s the Difference Between 401k and IRA? Here Are the Three Things Everyone Saving for Retirement Must Know

So, you’re thinking of your golden years in retirement. You know, those glorious days when you spend your time doing nothing at all. Maybe you’ll spend your retirement with your feet in the sand on the beach.

Perhaps you’d like to move to a quaint little town and enjoy some peace and quiet. No matter what your plans are, the one thing that’s for sure is you need money to make them possible. Saving for retirement is the only option since pensions, and social security checks aren’t going to be enough to cut it.

How do you know if you should put your money in an IRA or a 401 account? Here we’re going to talk about the three main differences between 401k and IRA that you should consider before setting up your retirement fund in either one.

It’s never too late to begin saving for retirement, and it’s something that you should begin doing as soon as you start working as an adult. Planning is the only way to live the best life later on when you have the time to enjoy it all.

3. You Can Take a Loan out of Your 401k

Taking Loans

You might be scratching your head, wondering why anyone would want to take a loan out of their 401k. You never know what life is going to throw at you. Let’s say that something awful happens, and you find yourself in need of $5,000.

Where are you going to get that kind of money? Sure, you could charge it on your credit cards. If you go that route, then be prepared to pay through the nose. If you ask your bank for a loan, you might get one, but there too, you’ll have to pay interest.

Sure, the bank loan will more than likely have a lower interest rate than with a credit card, but still, you end up paying way more than you should.

You can’t take out a loan out of your IRA. The money is in there, and you will be penalized for early withdraw. None of this is saying that you should use your 401k as your personal bank since the money is there for retirement.

It’s good to know that the money is there if you ever need it. The hope is that if something terrible happens, then you can use your emergency fund to take care of it. If that is not an option for whatever reason, then you can take a little out of your 401k to cover your expenses.

The average person is probably not going to be persuaded into opening a 401k so they can take out future loans, but it’s a nice piece of information to have in case the need arises.

2. Ira Enables You to Invest More Widely


Your 401k is mostly limited to investing in mutual funds. Mutual funds have less risk, and that’s why it’s not that big of a deal. A mutual fund is a rock-solid investment because they pool together everyone’s money and invest it in a wide variety of things.

Mutual funds aren’t the most exciting, and you shouldn’t expect a significant return on your money, but anything better than what the bank offers is better.

There’s nothing wrong with boring investments as they should be the majority of where your money ends up. The less risk, the better, and there’s almost nothing that’s less risky than a mutual fund.

Your investment options are much greater with an IRA. You can invest in stocks, bonds, and real estate with your IRA. The flexibility of an IRA is great, but it comes with a risk that a 401k doesn’t have.

So, if you’re the type who likes to gamble, then an IRA might be better suited for you. Choosing individual stocks can be tricky, but the reward is high if you’re able to pick a few winners. All it takes is a couple high earning stocks to send your IRA account into the stratosphere.

1. The Amount You Can Contribute Is Vastly Different

Difference Between 401k and IRA Contribution

If you have a 401k, the maximum amount you can contribute is $19,500. If you are over 50, then the amount you can contribute is $6,500 more. That’s not an amount of money to sneeze at.

That is a hefty amount of money, but also remember that the type of investing you can do is significantly limited. So, even though the amount may be more, the earning potential can be less since you’re only allowed to invest in mutual funds.

Does the ability to invest such a large amount of money outweigh the limitations? The answer to that question depends on your financial situation and how many more years you’ve got before you retire.

You’re allowed to contribute a maximum of $6,000 and $7,000 if you are over 50 to an IRA. You might also find that the tax situation is different with an IRA. Some people pay much less in taxes with their IRA than with a 401k.

You’ll have to talk about that with your financial advisor and whoever does your taxes. They will, without a doubt, know the ins and outs of the tax law and how much you can expect to pay.

How Do You Know Which Is Best for You?

The answer to that question depends on how much you want to invest and where. If you’re going to invest large amounts of money, then a 401k is a great way to do it. Sure, you don’t have flexible investment options, but the increase in your contribution levels make up for it.

If you’re the type who likes to invest in stocks, then you should go with an IRA. You’re allowed to have both an IRA and a 401k. So, if you’re really in the mood for a little adventure, contribute to both and learn how you can take advantage of each of them.

Nothing is stopping you from investing in both, and it might be a wise decision depending on your age and how much money you’ve got to invest. 

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