401K Vs. IRA: An In-Depth Comparison of Retirement Plans

Investment 101

Published: December 5, 2022

Senior couple planning their investments with financial advisor

When it comes to retirement savings, deciding whether to put your money in an IRA or 401(k) can be overwhelming. While you might have heard of these options, do you know much about them and how they differ?

If you’re stumped answering that question and are looking for a deeper side-by-side comparison between a 401(k) and an IRA, our experts have broken down each plan, compared their pros & cons, and are here to help answer which one might be better for your situation.

So, What Exactly Is A 401(k)?

A 401(k) plan is a retirement savings account that allows employees to save and invest pre-tax dollars for their future. It is sponsored by employers, who may also match employee contributions to a certain percentage of the employee’s salary. The money saved in a 401(k) can be invested in stocks, bonds, mutual funds, or other investment vehicles.

Generally speaking, any employee aged 18 or older with earned income from an employer can contribute to a 401(k) plan. There are no income limits on eligibility for contributing to a 401(k); however, annual contribution limits set by the IRS cannot exceed $19,500 yearly (as of 2022).

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What Is An IRA?

An Individual Retirement Account (IRA) is a savings plan that allows you to save money for your future while taking advantage of certain tax benefits.

To open an individual retirement account, individuals must meet certain eligibility requirements set forth by the IRS, including having earned income during the year and being under 70 ½ years old. Additionally, there may be other restrictions based on filing status or modified adjusted gross income levels, so it’s important to consult a financial advisor before opening an individual retirement account if you’re unsure if you qualify.

There are three main types of IRAs: Traditional, Roth, and Self-Directed.

Traditional IRA

A traditional IRA allows you to make pre-tax contributions, which means the amount you contribute will be deducted from your taxable income for the year. The money then grows tax-deferred until retirement age, when taxes are due on any withdrawals from the account.

Roth IRA

A Roth IRA works differently than a traditional IRA because contributions are made with after-tax dollars, meaning that no deduction is taken from your current taxable income when making contributions into the account. However, when funds are withdrawn at retirement age, they will not be taxed.

Self-Directed IRAs

Self-Directed IRAs allow investors more control over their investments by enabling them to invest in alternative assets such as real estate or private placements instead of just stocks and bonds like most other investment accounts do. This type of account also offers additional flexibility regarding contribution limits and withdrawal rules compared to traditional or Roth IRAs.

Still, additional fees may be associated with this type of account depending on what custodian holds it. It’s important to research thoroughly before investing in one if this option interests you.

Advantages of a 401(k)

401(k)s are one of the most popular retirement savings plans. They offer tax advantages, contribution limits, and other benefits that make them attractive to many investors.

Tax Benefits

One of the most significant advantages of a 401(k) is its tax benefits. Contributions to a 401(k) are made with pre-tax dollars, meaning you can reduce your taxable income for the year you contribute. Additionally, any earnings on those contributions will grow tax-deferred until withdrawal at retirement age. This allows more money to stay invested over time and potentially earn greater returns than if it were taxed annually as ordinary income.

Contribution Advantages

401(k)s have higher contribution limits than IRAs; individuals under 50 years old can contribute up to $19,500 per year, while those over 50 may be able to contribute an additional “catch-up” amount of $6,500 per year for a total annual limit of $26,000 (as of 2022).

Another advantage is that employers often match employee contributions to a certain percentage or dollar amount each year—essentially free money for investing in your future.

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401(k) Drawbacks

Despite their many advantages, 401(k)s have some drawbacks.

  • The account fees tend to be higher than those found in other investment accounts due primarily to administrative costs charged by plan providers and custodians.
  • Funds withdrawn from these accounts before age 59 ½ may incur penalties such as taxes plus an additional 10% early withdrawal fee from the IRS, so it is important not to touch this money unless necessary.
  • Because employer matching contributions vest gradually over time (typically 3–5 years), employees who leave their job before becoming fully vested forfeit any unused portion remaining in their account balance when they depart.

The Benefits of Opening An IRA

One of the most popular retirement savings options is an Individual Retirement Account (IRA). An IRA offers a variety of benefits, including tax advantages and flexible contribution limits.

Flexible Investment Opportunities

IRAs offer more flexibility than traditional workplace plans since they allow investors greater freedom when selecting investments. Stocks and bonds are popular IRA investment vehicles. However, investing in precious metals provides extra tax advantages and acts as a hedge against inflation during economic turmoil.

Tax Benefits

One major advantage to investing in an IRA is that contributions may be deductible from your taxable income for the year you make them. This can help reduce your overall tax burden and allow you to save more money for retirement. Additionally, any earnings on investments within an IRA are not taxed until they are withdrawn at retirement age.

Contribution Limits

While it may not seem an advantage initially, IRAs don’t come with employer-matching requirements. If saving for retirement isn’t tied to employment, this could be advantageous over a traditional plan like a 401K, as it won’t depend on whether a company employed someone for a specific number of years. A retirement account not tied to a company allows investment opportunities to be more flexible.

Fees & Investment Options

With an IRA account, investors typically have access to a wide range of investment options, such as stocks, bonds, and mutual funds, without paying additional fees or commissions on trades like they would with other types of accounts. However, some custodians may charge maintenance fees which should be considered when choosing where to open your account.

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Open a Self-Directed Precious Metals IRA Today

If you’re looking to diversify your retirement savings portfolio, a self-directed precious metals IRA may be the perfect solution. At Noble Gold Investments, you can purchase a wide range of precious metals like gold, silver, platinum, and palladium to save for retirement and protect your wealth against inflation.

If you’re interested in learning more about opening a self-directed IRA with Noble Gold Investments, give us a call today to speak to one of our experts. You can also click here to start the account creation process now.

Investment 101