401(k)s and IRAs offer distinct tax advantages for retirement savings, with key differences in contribution limits, employer involvement, and investment options. Here's what you need to know to make an informed choice.

401(k) vs. IRA: Core Differences

401(k)s are employer-sponsored plans, while IRAs are opened individually through financial institutions. 401(k)s allow higher annual contributions but typically offer fewer investment options compared to IRAs.

Contribution Limits (2025):

• 401(k): $23,500 (under 50), $31,000 (50+), $34,750 (60-63)
• IRA: $7,000 combined for traditional and Roth, $8,000 (50+)

Key Features Comparison:

401(k):

• Employer match (typically 3%)
• Pre-tax contributions reduce current taxable income
• Limited investment options
• Required minimum distributions start at 73
• Early withdrawal penalties apply before 59½

Traditional IRA:

• No employer match (typically)
• Tax-deductible contributions (income limits apply)
• Broad investment options
• Required minimum distributions start at 73
• Early withdrawal penalties apply before 59½

Roth IRA:

• No employer match
• After-tax contributions
• Broad investment options
• No required minimum distributions
• Contributions can be withdrawn penalty-free

Optimal Contribution Strategy:

With Employer Match:

1. Contribute enough to 401(k) to get full employer match
2. Max out IRA (traditional or Roth)
3. Return to 401(k) for additional contributions

Without Employer Match:

1. Start with IRA contributions
2. Consider 401(k) after maxing IRA
3. Focus on tax advantages and investment options

Investment growth is tax-deferred in traditional accounts and tax-free in Roth accounts. Early withdrawals generally incur 10% penalties unless exceptions apply.

Choose based on your specific circumstances, including employer match availability, income level, and retirement goals. Consider consulting a financial advisor for personalized guidance.

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