Is a 401(k) an IRA?

Last year, 60 million Americans participated in 401(k) programs, with half of Gen Z workers participating in some form of retirement program. While that’s great for the 60 million Americans that contributed to their future retirement, what about the other nearly 273 million people in the country?

Usually, we’ve found that when people don’t contribute to some sort of retirement account, it’s either because a) they don’t have access to one (which we’re working to change through our Small Business Growth Pack) or b) they don’t understand what retirement accounts are or which one to choose.

Seeing as very few of us had access to a proper financial education growing up, that’s actually pretty fair! So, let’s start from the beginning. We’ve already mentioned one of the most common retirement accounts that most people have heard of: the 401(k). The other popular one is an IRA. But, is a 401(k) an IRA? No. They’re similar, but here are the main differences.

What is a 401(k)?

A 401(k) is a tax-advantaged account that is set up by an employer that you contribute to with pre-tax wages. This means that contributions are not considered taxable income (in most cases). While most employers offer a traditional 401(k) account option, some offer Roth 401(k) options where you can contribute with post-tax wages. However, in either case, a 401(k) is a tax-advantaged account where you can grow your investments while also benefiting from compound interest.

When you set up a 401(k) account with your employer, a certain percentage will be deducted from your paycheck each month. That is the money that will go towards contributions to your retirement account. This makes it one of the easiest accounts to invest in because you don’t have to actively do much at all to make the money grow. And, 401(k)s are great for certain individuals whose employers offer contribution matching.

What is an IRA?

Unlike a 401(k), you traditionally have to set up an IRA on your own. IRA stands for Individual Retirement Account and it’s a similar type of retirement plan where you can, depending on whether or not you have a traditional or Roth IRA, grow your retirement investments in a tax-advantaged way; traditional IRA investments are made with pre-tax dollars and Roth IRA investments are made with post-tax dollars.

​​When you invest in an IRA, it grows via two methods: contributions and earnings. As you continue to contribute to your account over the years, it obviously grows in terms of the balance. However, there is also the potential to earn compound interest on the money that is there. Just how much it can grow really depends on the investments you’ve made within the account.

401(k)s vs. IRAs: The Similarities & Differences

Now that you’ve got a basic understanding of the fact that a 401(k) is not an IRA, let’s walk you through how they are similar (and different).

The Similarities Between a 401(k) & IRA

  • Both are a type of investment account that helps you save for retirement.
  • Likewise, both allow you to make ongoing contributions and capitalize your savings in the marketplace for possible growth over time.
  • Both have specific tax advantages, but each is slightly different.
  • Those tax advantages depend on whether you open a traditional or Roth account, which both 401(k)s and IRAs offer.

The Differences Between a 401(k) & IRA

  • For starters, your employer offers a 401(k) account as an employee benefit while you have to set up an IRA account on your own.
  • As well, with a  401(k), your employer might match up to a specific percentage of your contribution. On the contrary, your traditional IRA account is not tied to your employment, so you can’t benefit from that extra cash contribution.
  • And, finally, the biggest difference is perhaps in the contribution limits. For 2021, you can contribute up to $6,000 to a Roth or traditional IRA if you’re under 50. The limits for a 401(k) account are $19,500 if you’re contributing solo or a combined total of $58,000 if your employee offers matching.

So, Is a 401(k) an IRA?

Nope! They’re both retirement accounts, but they have different contribution limits and advantages.

Which one is right for you? If your employer offers contribution matching, it’d be a no-brainer to opt for a 401(k). However, if you’re looking to enjoy those contribution matching benefits while simultaneously lowering your tax burden right now, opt for a traditional 401(k).

If you’re currently in a lower tax bracket and expect to be earning much more when you retire, it probably makes more sense to contribute to a Roth 401(k). However, fewer employees offer this option.

If you’re self-employed, want to save alongside a 401(k) plan, want access to a wider selection of investment alternatives, or are expecting to be in a much higher tax bracket when you retire, setting up a Roth IRA account is a great option for you. 

Invest in Yourself with Wealth Stack

Now that you know a 401(k) is not an IRA and understand a bit of the benefits of both, it’s time to start investing in yourself and your future. To make that a whole lot easier for you, we’ve created Wealth Stack. Through our unique, educational financial platform, you can learn all about investing, whether that’s in your own retirement or in stocks you’re interested in.

Download the app to get started learning all about investing today!

Don’t need a retirement plan for yourself but are a business owner? You could benefit from our Wealth Stack Growth Pack. It’s an easy, affordable solution for small business owners looking to attract and retain top talent through competitive retirement offerings. 

Via the Wealth Stack platform, you’ll not only be able to access industry insights and book in time with our CEO and former investment banker, but you can quickly upload your employees’ information so that we can manage their IRA accounts for them. And, your employees will have access to exclusive educational content via our app that will help ensure their growing wealth wisely.

Click here to learn more about the Wealth Stack Growth Pack.