Difference Between 401k and IRA

What are the differences between a 401k and an IRA?

Note: The real way name is "401(k)," but, for simplicity's sake, I will call it "401k."

• A 401k is administered through your employer and not all employers have a 401k plan.
• IRA stands for individual retirement account and there are two main types of IRAs -- Traditional IRA and Roth IRA. Unlike 401k's, IRAs are managed completely by you.
• Traditional IRAs are like the 401k in a big way -- you put pre-tax dollars in the plans. In other words, both of those types of accounts reduce your taxable income and postpone the taxes you pay on the income until you withdraw the money, and any gains on that money, in a retirement.
• You invest money in a Roth IRA in post-tax dollars. In other words, when you put money in your Roth IRA you will already have paid taxes on that money. You will not have to pay taxes on the gains from those investments.
• If retired, you can take money out penalty-free from a 401k at 55. With an IRA, you can't do that until 59 1/2.
• 401k's often have extra incentives from your employer. A common incentive is 401k matching where companies will match their employees' 401k contributions up to a percentage.

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