Differences and similarities between 401(k) and IRAs

Preparing for retirement should be a top priority for any young adult. Planning ahead now will save you from hitting the panic button later.

For example, a 25-year-old who saves $5,000 into a 401(k) each year (counting his employer’s five-percent match), calculating a somewhat modest five percent return on the annual investment, will have saved $125,000 by the time he or she is 45, and more than $200,000 by the time they are 60.

The top two savings vehicles to prepare for when you call it quits from work are 401ks and Individual Retirement Accounts, or IRAs. There are specific differences between the two and similarities as well. Here are some things to know before you invest.

Pre-taxed 401(k), Post-tax IRA contributions

Employee-sponsored 401ks take money out of your gross income, meaning that the money isn’t taxed when it’s added to your retirement account, only when it’s withdrawn. IRAs are taxed before the money is placed into the retirement account.

Contribution limit for IRAs lower than 401(k)

According to the IRS, you can only contribute a maximum of $5,500 to either a Roth or traditional IRA with a $1,000 catch-up allowance for people age 50 and over for the 2015 tax year, as opposed to $18,000 and a $6,000 catchup to those with those with pension plans.

No income limits for 401(k)

If you’re married, filing taxes jointly and earn more than $183,000, the amount you’re able to contribute to a Roth IRA starts to dwindle until your income reaches $193,000, when you can no longer contribute anything. The amounts vary for single and married couple who file separately.

For a full explanation of retirement plan contribution limits and withdrawal requirements, visit the IRS website.


Please consult your tax advisor on what type of retirement fund is right for you. Travis Credit Union does not offer tax advice.