Learning (and understanding) all the terms related to retirement can feel overwhelming. A good place to start? The basics.
When it comes to retirement accounts, that means tackling the differences (and similarities) between the most common types of retirement plans: employer-sponsored plans—401(k)s and 403(b)s—and individual retirement accounts (IRAs).
4 ways 401(k)s, 403(b)s, and IRAs are the same
| Purpose | Investment accounts that can help save for retirement |
| Contributions | Ongoing or one-time |
| Tax benefits | Both lower taxable income (401(k)s and 403(b)s through payroll deductions, IRAs through possible tax deductions) |
| Tax obligations | Applicable state and federal income taxes due at minimum withdrawal age |
6 ways 401(k)s/403(b)s and IRAs are different
| Differences | 401(k)s and 403(b)s | IRAs |
| Access | Sponsored by employer | Set up by and belongs to you, regardless of where you’re employed |
| Available investment options | Employer typically chooses; may be limited | May have more investment options |
| Match | Employer may match up to a certain percentage of your contribution | No employer match |
| Rollovers | Rollover may be required when leaving a job (see below) | Can roll over funds from previous employer plans or other IRAs into an IRA (called consolidation) |
| Tax deductions | Not tax deductible | May be deductible, depending on your spouse’s retirement plan access and your income |
| When you leave a job | Can roll over 401(k) savings into an IRA or 401(k) at a new employer (if available) | No effect; an IRA belongs to you and moves with you, regardless of employment |
2 reasons to invest in a 401(k) or 403(b)
- You may have access to one where you work.
- Your employer may offer to match a percentage of your contribution.
3 reasons to invest in an IRA
- You don’t have access to a 401(k) or want to save in addition to what you’re saving through your employer.
- You’re self-employed and want to save regularly for retirement.
- You want to consolidate multiple retirement savings accounts.
One last note: A traditional IRA is not the same as a Roth IRA. And yes, you can have a 401(k), an IRA, and a Roth IRA.
What's next?
- If you have a retirement account, putting away a little more each year is one way to help boost your savings rate without much impact on your daily budget. to see how much you’re saving. Don’t have an employer-sponsored retirement account? We can help you set up your own retirement savings.
