If you have done any retirement planning at all you have run across both of these terms. While they sometimes can seem interchangeable, there are some very distinct differences between a 401k and an IRA.

Employer vs. Individual

The main difference between a 401k and an IRA is who sets them up. An IRA is an individual account that you will set up on your own. A 401k is something that is set up by your employer. 401k actually refers to the part of the tax code that your employer is using.

This means that anyone who is under the age of 70 can put money away in an IRA account. To have access to a 401k you must work for an employer that offers this benefit to you.

Contribution Limits

Each of the accounts has a maximum that you can contribute in a year. This amount changes from year to year. For example, in 2014 the maximum contributions to a 401k were $17,500 and for an IRA it was $5,500. You need to be cognizant of these limits as if you go over there can be penalties involved.

Keep in mind that if your employer does any 401k matching, the maximum does not count that towards the limit.

Investments

401k investments are limited typically to what mutual funds your company has as part of the plan. IRAs have a much wider range of investment options.

If you have any legal questions about retirement or elder law in general, contact Stano Law group.