What’s a 401(k) and an IRA, and what’s the difference?
A 401(k) is a retirement savings plan offered by companies to employees. Many firms also match, meaning they’ll contribute the same amount you do to your retirement, usually up to a certain amount. Only your contributions count toward the IRS cap, so matching can boost your total savings over the IRS cap and is what advisers call “free money.” So at least contribute enough to get the full match, if you can, advisers say.
Contributions are taken from your paycheck before taxes, so that also lowers your taxable income. You pay taxes only on withdrawals, so your money grows tax-free in your 401(k).
IRAs are opened by individuals through a brokerage or bank. Depending on your income and filing status, all or part of your contributions may be fully or partially deductible, making this investment tax-advantaged too. Only withdrawals are taxed.