There are lots of ways to save for retirement, but many people turn to the two main types of retirement plans: 401(k)s and IRAs. Here’s how they’re alike—and different.
Learning (and understanding) all the terms related to retirement can feel overwhelming. A good place to start? The basics.
When it comes to retirement accounts, that means tackling 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).
4 ways 401(k)s, 403(b)s, and IRAs are the same
|Purpose||Investment accounts that can help save for retirement|
|Contributions||Ongoing or one-time|
|Tax benefits||Both lower taxable income (401(k)s and 403(b)s through payroll deductions, IRAs through possible tax deductions)|
|Tax obligations||Applicable state and federal income taxes due at minimum withdrawal age|
6 ways 401(k)s/403(b)s and IRAs are different
|Differences||401(k)s and 403(b)s||IRAs|
|Access||Sponsored by employer||Set up by and belongs to you, regardless of where you’re employed|
|Available investment options||Employer typically chooses; may be limited||May have more investment options|
|Match||Employer may match up to a certain percentage of your contribution||No employer match|
|Rollovers||Rollover may be required when leaving a job (see below)||Can roll over funds from previous employer plans or other IRAs into an IRA (called consolidation)|
|Tax deductions||Not tax deductible||May be deductible, depending on your spouse’s retirement plan access and your income|
|When you leave a job||Can roll over 401(k) savings into an IRA or 401(k) at a new employer (if available)||No effect; an IRA belongs to you and moves with you, regardless of employment|
2 reasons to invest in a 401(k) or 403(b)
- You may have access to one where you work.
- Your employer may offer to match a percentage of your contribution.
3 reasons to invest in an IRA
- You don’t have access to a 401(k) or want to save in addition to what you’re saving through your employer.
- You’re self-employed and want to save regularly for retirement.
- You want to consolidate multiple retirement savings accounts.
One last note: A traditional IRA is not the same as a Roth IRA. And yes, you can have a 401(k), an IRA, and a Roth IRA.
- If you have a retirement account, putting away a little more each year is one way to help boost your savings rate without much impact on your daily budget. Log in to your Principal account to see how much you’re saving. Don’t have an employer-sponsored retirement account? We can help you set up your own retirement savings.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals, and other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
You should consider the differences in investment options and risks, fees and expenses, tax implications, services and penalty-free withdrawals for your various options. There may be other factors to consider due to your specific needs and situation. You may wish to consult your tax professional or legal counsel.