What is an IRA vs. 401(k)? Both are great ways to save for retirement that allow you to invest for the future in a tax-efficient way. But each account comes with a unique set of advantages and drawbacks.
The main difference is that a 401(k) is an employer-sponsored account, so you can only participate in one if your job offers it as a benefit. Also, your company decides which investments are available, meaning you have limited control over what you can invest in and how much you pay in investment costs.
On the bright side, you can often score free money with 401(k) plans. Many employers match a portion of employee contributions — adding 50 cents to $1 for every dollar you put in, often up to 6 percent of your total salary. So make sure you contribute enough to capture the full match and don't leave money on the table. In 2020, the contribution limit is $19,500 ($26,000 if you’re age 50 or older).
Video by Ian Wolsten
Meanwhile, almost anyone who’s earned income this year can open an Individual Retirement Account, or IRA. There are some restrictions to consider, though, based on what type of IRA you choose.
With an IRA, you have many more investment options — basically any stock, bond, mutual fund or exchange-traded fund offered by your brokerage. So you're free to diversify your portfolio and minimize costs as much as possible.
The downside of an IRA vs. a 401(k)? By itself, it probably won't be enough to retire on. The most you can contribute in 2020 is $6,000 ($7,000 if you're age 50 or older).
If you’re trying to choose between one or the other, don’t worry about committing. Use both! Many experts recommend first contributing enough to your 401(k) to capture the company match, then maximizing your IRA contributions. After that, go back to maxing out your 401(k).
This information is being provided for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. You should consult your tax or legal adviser regarding such matters.
This story was updated in December 2019.
More from Grow: