Posted by Brian Colvert
A bonfire is a fire of celebration. As I look back on my life some of the best memories and conversations have happened sitting around the fire. I have been…
There are some common misconceptions about the differences between an IRA and a 401k. While these two are very similar there are some distinct differences that make each unique.
Before we tackle the differences between an IRA and a 401k its important to note that these are not investments. They are accounts. Just because you have an account open does not mean you have investment that will grow and help fund your retirement. Much the same way that just because you own a refrigerator doesn’t mean you actually have any food in it. To continue with this analogy… in your fridge you can have a variety of different types of food (juice, pickles, eggs, beer, and anchovies- if you’re into that sort of a thing), in an IRA and 401k you can have different investments too, like stocks, bonds, mutual funds, etfs, commodities, real estate, and more. You can also change or “throw out” the Investments in your IRA or 401k if you’ve left them in that back of the fridge for too long, you know like that 3lb. jar of mayo you bought for that party that one time.
Now that you are hungry, lets get to the meat of it, how they are similar?
Now on to the differences.
While an IRA and a 401k have many similarities, they do differ is a few very key areas. The main one being that an IRA is Individual Retirement Account, so it is your and yours alone and anyone can have one, while a 401k is company sponsored, so you can only participate in it if you are employed by a company that has one (or are the owner and created one). Some other key differences are:
Maximum Annual Contribution (2018)
Amount you can add if you are over 50 years old (in addition to max contribution)
Yes, if offered
Types of investments
Almost anything from Stocks and Bonds to Real Estate and Collectables. There are strict guidelines on some of these so make sure to consult your advisor and tax professional.
Typically limited to what the company offers. There are some exceptions to this.
So, which is right for you? It depends. If you have the option of putting your money into an employer-sponsored 401k or an IRA you should do both and max them out if possible. We recommend prioritizing the 401k first and then adding to the IRA if you are within the income limits.
This hopefully gives you a good overview of the differences between an IRA and 401k. While there are many factors to consider, the most important thing to remember is that both are great tools to use to help achieve your retirement goals.
We’ll plan to discuss how Roth IRA’s and various other types of 401k options might work for you soon, but in the meantime if you’d like a personalized recommendation please reach out to us as we are always happy to help!