401(k), IRA, and 403(b) are all types of retirement savings plans available in the United States. They have some similarities, but there are also some differences between them:
401(k): A 401(k) is a retirement savings plan offered by employers to their employees. Employees can contribute a portion of their pre-tax income to their 401(k) accounts, and the employer may also make matching contributions. The contributions are invested in a range of investment options, and the earnings grow tax-deferred until they are withdrawn in retirement. Withdrawals are taxed as ordinary income, and there may be penalties for early withdrawals before age 59 1/2.
IRA: An Individual Retirement Account (IRA) is a retirement savings account that an individual can set up on their own. Unlike a 401(k), an IRA does not require an employer to participate. There are two types of IRAs: traditional and Roth. Traditional IRA contributions are tax-deductible, and earnings grow tax-deferred until they are withdrawn in retirement. Withdrawals are taxed as ordinary income. Roth IRA contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free.
403(b): A 403(b) is a retirement savings plan for employees of non-profit organizations, such as schools and hospitals. It is similar to a 401(k), but the investment options may be more limited. Employees can contribute a portion of their pre-tax income to their 403(b) accounts, and the employer may also make matching contributions. The contributions are invested in a range of investment options, and the earnings grow tax-deferred until they are withdrawn in retirement. Withdrawals are taxed as ordinary income, and there may be penalties for early withdrawals before age 59 1/2.
In summary, while all three plans are designed to help individuals save for retirement, the main differences between them lie in their eligibility requirements, investment options, contribution limits, and tax treatment.
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. |
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply. |