According to official estimates, nearly half of all employees in the United States do not have a retirement plan. Although retirement nest eggs have always been important for working individuals, the current economic climate has made it necessary to consider their financial futures seriously. For employees who wish to start saving for their retirements, IRAs and 401(k) accounts are two of the most popular options. These retirement savings plans offer working individuals to contribute a set maximum percentage of their annual earnings to their savings accounts and have access to tax benefits and other bonus features. While both IRA and 401(k) are types of retirement savings plans that allow individuals to meet their post-retirement financial goals, there are some key differences. The financial advisors at Ubiquity have provided very important information regarding the major differences between IRA and 401(k).

What Is An IRA?

IRA account

An IRA is a personalized retirement savings plan that allows working persons to add funds to their retirement fund. IRAs are typically not sponsored by employers and allow employees to contribute more to their retirement fund compared to other forms of employer-sponsored plans. IRAs offer individuals various tax advantages, like tax deferrals, diversified investments, and more.

What Is A 401(k)?

401k plan

A 401(k) is an employer-sponsored retirement savings account that allows employees to deposit a set amount of money to their retirement fund each year. Once employees sign up for these plans, their employers deposit part of their income directly into their savings account, and in most cases, match part or all of the contribution made by employees to their accounts. Employees have access to a wide range of investment options, with the money being deposited by their employers as matched contributions available for investment immediately.

How Do IRAs And 401(k) Plans Differ?

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Although both IRA and 401(k) are types of retirement savings plans, they have a few key differences. For one anyone currently employed and eligible can open an IRA on their own. On the other hand, employers offer 401(k) plans, and you cannot open a 401(k) account on your own. Additionally, since 401(k) plans are employer-sponsored, employers make matching contributions to their employeesโ€™ 401(k) accounts, unlike IRAs where no matching employer contributions are seen.

IRA and 401(k) plans also differ when it comes to the availability of potential investment options. In general, IRAs offer more options for investment of retirement funds compared to 401(k) accounts. Since 401(k) plans are offered by companies to their employees, they have a say in which investment options they select for their employees. As IRAs are individualized plans, employees have the financial freedom to invest in more options. The most significant difference between these two plans exists in their contribution limits. IRAs have a maximum contribution limit of $6,000 compared to the $20,500 offered by 401(k) plans. At $6,500 vs. $1,000, 401(k) plans also have higher catch-up contribution limits than IRAs.


If you are searching for retirement savings plans that will allow you to save for a financially secure future, both 401(k) and IRA are excellent options. Each plan has its benefits and drawbacks that must be carefully considered before enrollment. These plans differ regarding maximum contribution limits, employer-matched contributions, catch-up contributions, investment options, and more.

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