401(k) vs. IRA (Traditional & Roth)

401(k)s and IRAs are both retirement plan options that offer tax-advantaged ways to save for retirement. While there are similarities between 401(k) plans and IRAs, such as penalties for early withdrawal, these plan options are distinct in variety of ways.

Can I Have an IRA and a 401(k)?

Yes, absolutely. Having both is an effective way to diversify your retirement portfolio. Financial professionals generally recommend taking advantage of 401(k) employer-matching programs and contributing the maximum allowed in your 401(k); and then investing in an IRA with if you have leftover funds.

Which Plan Is Better?

If your employer offers a 401(k) option with employer matching, it’s generally better to fund your 401(k) first since there is no employer matching for an IRA. In addition to the employer match, the “Age 50 Catch-Up” contribution allowed for a 401(k) is higher than for an IRA. As a supplemental source of retirement income, however, Roth or traditional IRAs can be valuable.

How Does a 401(k) Employer Match Work?

With employer matching, your employer matches the amount you fund your 401(k) up to a certain amount or percentage.

If your employer offers an employer match, be sure to contribute as much as you can to your 401(k) to make the most of the additional money your employer is willing to give. Even if you can’t contribute to your plan to take full advantage of the match; any amount from your employer is free money. You can always start at a lower contribution amount and increase the contribution as you go along.

While there are different types of employer matching with a 401(k), a common model is the 3% dollar-for-dollar match. This means your employer would match 100% of your contributions up to 3% of your salary.

For example, your salary is $80,000 a year, and your employer matches 3% of your 401(k) contribution. If you contribute $2,400 to your 401(k), (which is 3% of your salary) your employer would also contribute $2,400, the maximum dollar-for-dollar match.

Do IRAs Include Employer Matching?

Neither Roth IRAs nor traditional IRAs include employer matching provisions; the account holder fully funds the account.

How do 401(k), Roth IRA, and Traditional IRA Plans Differ?

The chart below offers a comparison of some key provisions.

  401(k) Roth IRA Traditional IRA
Employee Contribution Limits $23,000 $7,000 $7,000
Taxation Pre-tax contribution; taxed on withdrawal Post-tax contribution; no tax on withdrawal Pre-tax contribution; taxed on withdrawal
Employer Match $69,000 maximum None None
Distribution Age By April 1 of the year following the calendar year in which you reach age 73* Distribution not required until owner’s death By April 1 of the year following the calendar year in which you reach age 73*
Required Minimum Distributions Starting at age 73* None during the owner’s lifetime Starting at age 73*
Age 50 Catch-Up Contributions $7,500 $1,000 $1,000

Questions about 401(k)s or IRAs?

Contact MissionSquare Retirement.

* Age 70½ (if you were born before July 1, 1949), age 72 (if you were born after June 30, 1949, and before January 1, 1951), or age 73 (if you were born after December 31, 1950).

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