IRA vs 401(k) Comparison Calculator
Compare the pros and cons of an IRA and a 401(k) to determine which retirement savings vehicle is best for your financial goals.
Understanding the Differences: IRA vs. 401(k)
Deciding between an Individual Retirement Arrangement (IRA) and an employer-sponsored 401(k) plan is a key step in building your retirement savings. While both are powerful tools, they have distinct features that can impact your financial strategy. Our calculator helps you visualize the potential growth of both accounts side-by-side, but it's important to understand the fundamental differences.
A **401(k)** is a retirement savings plan offered by an employer. One of its most attractive features is the **employer match**, where your company contributes money to your account based on your own contributions. This is essentially free money and is often the first reason to prioritize a 401(k). Additionally, 401(k) plans have higher annual contribution limits compared to IRAs, allowing you to save more each year.
An **IRA** is a retirement savings account that an individual can open on their own, separate from an employer. This gives you more control over your investment choices and is an excellent option if you are self-employed, work for a company that doesn't offer a 401(k), or want to save more beyond your 401(k) contribution limit. IRAs have lower annual contribution limits than 401(k)s.
The primary tax difference lies in the **Traditional vs. Roth** options. Both IRAs and 401(k)s often come in these two versions:
- **Traditional:** Contributions are made with pre-tax dollars, reducing your current taxable income. Your money grows tax-deferred, and you pay taxes on withdrawals in retirement.
- **Roth:** Contributions are made with after-tax dollars, meaning they don't lower your current taxable income. Your money grows tax-free, and qualified withdrawals in retirement are also tax-free.
When to Choose Which?
A common strategy is to first contribute to your **401(k)** up to the full amount of the **employer match**. Since the match is free money, it’s a guaranteed return on your investment that you shouldn’t pass up.
After securing the match, many financial advisors recommend funding a **Roth IRA** next. A Roth IRA offers you tax-free growth and tax-free withdrawals in retirement, which can be incredibly valuable, especially if you expect to be in a higher tax bracket later in life. Additionally, IRAs often provide a wider range of investment options than a 401(k).
Finally, if you have maxed out your IRA contributions, you can return to your **401(k)** and contribute the remaining amount up to the IRS annual limit. This strategy ensures you take advantage of all available retirement saving opportunities, including the employer match and tax-free growth.