Why is financial literacy important? It gives you the knowledge and skills needed to manage your money effectively. Yet many people still have unanswered questions about budgeting, investing and paying off debt.
According to Google search trends in New England, some of the most common financial questions are:
- “What’s a 401k”?
- “Is a 401k the same as an IRA?”
If you’re wondering the same, here’s a breakdown of 401(k) plans and IRAs to help you make informed decisions about your retirement savings.
What Is a 401(k)?
A 401(k) is a company-sponsored retirement plan that allows employees to contribute part of their income to a tax-advantaged account and many employers offer matching contributions.
Types of 401(k) Plans
Traditional 401(k):
- Pre-tax contributions lower your taxable income during the year.
- Funds grow tax-deferred; you won’t pay taxes until you withdraw money in retirement (starting at age 59 ½).
- If you were born between 1951 and 1959, you are required to begin taking Required Minimum Distributions (RMDs) at age 73. If you were born in 1960 or later, your RMDs begin at age 75.
Roth 401(k):
- After-tax contributions mean taxes are paid upfront
- Funds grow tax-free; when you make withdrawals at retirement age (after 59 ½), no additional taxes apply.
- Similar to a traditional 401(k), RMDs begin at age 73 for those born between 1951 and 1959, and at age 75 for those born in 1960 or later.
Employees can allocate a portion of each paycheck toward stock mutual funds and other high-growth investments, helping their money grow over time.
According to the U.S. Bureau of Labor Statistics, 49 percent of Americans participated in a 401(k) or similar plan as of 2024.
In 2025, the annual contribution limit to a 401(k) is $23,500. Individuals aged 50 and older can make an extra $7,500 contribution each year to boost their retirement savings.
What Is an IRA?
An Individual Retirement Account (IRA) is a personal investment tool designed to help you grow retirement funds, while enjoying tax advantages. Unlike a 401(k), an IRA is not employer-sponsored and can be opened at a financial institution of your choice.
Types of IRAs
Traditional IRA:
- Depending on your income, contributions may be tax-deductible, helping to lower your taxable earnings.
- Money grows tax-deferred, meaning you won’t owe taxes until you start making withdrawals in retirement.
Roth IRA:
- Contributions are made using after-tax income but under qualifying conditions, growth and future withdrawals remain tax-free.
- Unlike 401(k) and Traditional IRAs, Roth IRAs do not require minimum withdrawals.
Rollover IRA:
- Designed for individuals who transfer funds from an old employer’s 401(k) or 403(b) into an IRA, preserving tax advantages.
Anyone with earned income, including spouses, can open an IRA. Money compounds over time, helping your savings grow faster. For 2025, the maximum annual IRA contribution is $7,000, with an additional $1,000 allowed for individuals aged 50 and above.
Which Retirement Plan Is Best for You?
Choosing between a 401(k) and an IRA depends on your financial goals and preferred investment options. A 401(k) may be right if:
- You want to contribute more money annually with potential employer matching.
- You prefer not to make frequent investment decisions.
An IRA could be a better fit if:
- You want more investment options, including stocks, bonds, CDs, and ETFs.
- You prefer working with a broker who can help manage your investments.
Saving for retirement doesn’t have to be complicated! To learn more about your options, contact Ion Bank or Ion Investments today.