Q:

Is a 401(k) an IRA?

A:

Quick Answer

A 401(k), a retirement plan offered by or through an employer, is not the same as an IRA that an investor sets up himself through a bank or mutual-fund adviser. Both reduce an investor’s taxable income, but it’s possible to withdraw money from an 401(k) early.

 Know More

Full Answer

The biggest difference between the two may be that employers can elect to contribute matching money to a 401(k), sometimes as much as 6 percent. More money in contributions means the fund builds faster. Another big difference is the investment opportunities open to IRA owners, who have the option to invest in stocks, bonds and mutual funds of their choosing. Since IRAs are completely separate from 401(k) plans, investors can diversify their retirement investments, providing a real boon in an unstable employment market.

With both 401(k)s and IRAs, there are limits to how much a person can contribute in a single year. As of 2013, investors age 49 and younger had a cap of $17,500, while investors over 50 could contribute $23,000. IRAs limit yearly contributions to $5,500 for investors 49 and younger and $6,500 for those 50 and older. While an investor can withdraw money early from a 401(k), the rules governing IRAs don't allow the same.

Learn more about Financial Planning

Related Questions

  • Q:

    What is a traditional IRA?

    A:

    A traditional IRA, or Individual Retirement Account, is a designated monetary account that workers can pay into in order to have savings for their retirement. Traditional IRAs are held by banks or other financial institutions.

    Full Answer >
    Filed Under:
  • Q:

    What are the fees required to manage IRA accounts?

    A:

    Fees charged to manage IRA accounts can vary, but a fee-only adviser should only charge 1 to 1.5 percent of the total account, explains Charles Sizemore for Investor Place. In addition, an IRA adviser who sells commissionable products such as certain mutual funds should not charge any fees at all.

    Full Answer >
    Filed Under:
  • Q:

    How are Roth IRA distributions taxed?

    A:

    An investor can withdraw his Roth IRA contributions at any time without tax or penalty. To withdraw earnings or interest the Roth IRA earns without paying taxes, he must be at least 59 1/2 and the Roth IRA must be at least 5 years old.

    Full Answer >
    Filed Under:
  • Q:

    What are the rules for withdrawing from an IRA?

    A:

    Investors withdrawing from an individual retirement account (IRA) before they reach the age of 59 1/2 will have to file a 1040 form showing the withdrawal and accepting an additional tax burden for early withdrawal. This tax burden cannot be deducted and, beginning at age 70, there are required yearly withdrawals necessary to keep the account in good standing.

    Full Answer >
    Filed Under:

Explore