Many people are unsure about the differences between a traditional IRA and a 401(k). Both have accounts that provide tax-deferred growth on the money in the account. Withdrawals from the accounts are taxed at ordinary income tax rates. But IRAs and 401(k)s differ in terms of eligibility, contribution limits and how you can access your funds.
A 401(k) is an employer-sponsored plan offered only to employees. An IRA is an individual retirement account and can be set up by anyone. You can contribute more to a 401(k) each year than you can to an IRA; the same applies to the “catch up” provisions for those over 50 – you can add more to a 401(k) than to an IRA. 401(k)s can provide loan provisions, but IRAs cannot. You can’t contribute more than you earn with either an IRA or a 401(k) account, but must refer to the annual IRS publication to determine the maximum contribution amounts for both.
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