What's the difference between a 401(k) and an IRA?
Both 401(k)s and IRAs are retirement accounts. The main difference is that 401(k)s come from employers, so if you are a freelancer, contractor, or self-employed, then you probably don’t have the option to contribute to a 401(k). Another difference is that 401(k)s let you contribute more money to them each year.
The contribution limits are outlined in the table below:
| IRA | SEP IRA | 401(k) | |
|---|---|---|---|
| Limit | $6,000 | $61,000 or 25% of income | $20,500 |
| Limit if over 50 | $7,000 | $61,000 or 25% of income | $26,000 |
If you have the ability to contribute to a 401(k), especially if your employer will match any of your contributions, then it’s a good idea to maximize your contributions.
In general, you’re also allowed to contribute to both your 401(k) and an IRA, so you can save even more money than the contribution limit for only one type of account. If you don’t have a 401(k) available to you, then you can still contribute to both a SEP IRA and a Roth IRA, for example.