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Is a 401(k) an IRA?

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Quick Answer

A 401(k), a retirement plan offered by or through an employer, is not the same as an IRA that an investor sets up himself through a bank or mutual-fund adviser. Both reduce an investor’s taxable income, but it’s possible to withdraw money from an 401(k) early.

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Full Answer

The biggest difference between the two may be that employers can elect to contribute matching money to a 401(k), sometimes as much as 6 percent. More money in contributions means the fund builds faster. Another big difference is the investment opportunities open to IRA owners, who have the option to invest in stocks, bonds and mutual funds of their choosing. Since IRAs are completely separate from 401(k) plans, investors can diversify their retirement investments, providing a real boon in an unstable employment market.

With both 401(k)s and IRAs, there are limits to how much a person can contribute in a single year. As of 2013, investors age 49 and younger had a cap of $17,500, while investors over 50 could contribute $23,000. IRAs limit yearly contributions to $5,500 for investors 49 and younger and $6,500 for those 50 and older. While an investor can withdraw money early from a 401(k), the rules governing IRAs don't allow the same.

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