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What's the difference between a 401k and an IRA?

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What's the difference between a 401k and an IRA?

Old 06-06-15, 08:27 PM
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What's the difference between a 401k and an IRA?

I really don't know much of anything about retirement plans. I'm 36 years old, and I don't have a dime saved for retirement. Yikes. I'm probably going to be in trouble and never be able to retire, but I have never had a job where I made enough money to actually save anything. I have never had a job where the employer contributes to a retirement plan either, so I never bothered to look into it much.

Anyway, my question is regarding the difference between a 401k and an IRA? I have done some googling, and it appears that a 401k is something an employer sets up, and an IRA is something a person sets up individually. That confuses me because I just sent a resume to a company that has an open position, and they list a matching IRA as one of their benefits. If an IRA is set up by an individual person, then why is a company doing it and making a match? Why wouldn't they be doing a 401k instead? I'm confused.
Old 06-06-15, 08:50 PM
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Re: What's the difference between a 401k and an IRA?

It is probably SIMPLE-IRA. They are much simpler (hence the name) for a company to operate as they do not have the large amount of regulation that a 401k has and are much, much easier to administer. They also have no cost other than the match. No tax return, third-party administrator, mountain of disclosures, etc.
Old 06-06-15, 08:52 PM
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Re: What's the difference between a 401k and an IRA?

That's pretty much it. 401k (or 403b depending upon the employer) refers to the tax code that allows employers to set aside money for their employees, as opposed to a pension plan which used to the norm. I suspect the benefit the company is talking about is a 401k but they are trying not to confuse people (oh well) but using that term [edit: or the simple IRA cdollaz mentioned... forgot about those ]. Typically a company will give you an X for Y match up to a certain $ or % of your salary. For example $1 for every $2 up to 3% of your salary. You are free to contribute more (up to a certain legal limit established by the IRS) you just won't get the matching funds. Additionally outside of the company you are free to setup your own traditional IRA on your own. This is something you obviously won't get a match for but you usually have more freedom wrt what you want to do w/ it (most company plans are w/ a specific investment firm that have their own selection of stocks/funds, if you go on your own you can use anyone). Again though that overall max contribution limit applies to all IRAs you may have.

This may help answer some of your questions too https://investor.vanguard.com/ira/401k-vs-ira

The other thing that might throw you for a loop is the fact some companies are now offering ROTH 401ks. Now the difference between a ROTH and a traditional IRA is related to how the money is paid in and taxed. Traditional IRAs (and 401k/403b) are paid w/ pre-tax dollars. That means they are off the top of your salary (in the case of a 401k/403b you never see the money) in the case of a traditional IRA you can deduct the money from your taxes. When you start withdrawing funds at retirement that money is taxed at whatever your current tax rate is at the time. ROTH IRAs (and ROTH 401k/403b) are paid into w/ post tax dollars (there are also contribution limits that are much more restrictive than the traditional IRAs) however all growth/earning/distributions when you finally start taking it out are tax free.

Oh one other thing you'll probably hear about wrt the employers plan is "vesting". Any money you contribute to the plan is your to keep/take out/move to another plan if/when you leave the company at any time. Most likely the employer has a vestment schedule which is what portion of the match is "yours" at any given time. For example if you vest 25% a year for 4 years that means if you leave between the first year and second year you get 100% of what you put into the plan, and 25% of what they put into the plan. Between two and three years you'll have 50% of their contributions, after 4 you get everything.

My recommendation, assuming you get the job, would be to contribute as much as you can to get the full match from the employer's plan. Then setup your own ROTH IRA and try as best as you can to max that out every year. If you don't get the job I still recommend setting up a ROTH IRA and contributing as much as you can to it. WRT what to put the money into in the account (whether the 401k/403b/your own IRA or the ROTH) if you don't want to get too involved w/ it just pick a couple of funds to put the money into. If you really want to be hands off they are making age targeted funds now, so you pick either what year you think you are going to retire or in about how many years you are going to retire (the specifics depend upon the firm you are using) and it will give you a fairly balanced portfolio that they'll adjust over the years for you.

Last edited by nemein; 06-06-15 at 09:09 PM.
Old 06-06-15, 09:10 PM
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Re: What's the difference between a 401k and an IRA?

Thanks for the help. So the main difference between a traditional IRA and a ROTH IRA is the former is pre-tax and the latter is post-tax? Wouldn't it basically be a guessing game which is better since you can't really predict whether taxes will be higher or lower in the future? Also, how much trouble am I in with being 36 years old and not having saved anything for retirement yet? I figure there's no way I will ever retire at 65, but maybe 70 or is that too optimistic?
Old 06-06-15, 09:19 PM
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Re: What's the difference between a 401k and an IRA?

There is some of that. The traditional IRA has a higher contribution limit though.

Obviously the sooner you can start saving the better, which is why I recommend at least starting the ROTH if nothing else. You're not going to get the full effect of compounding (which is where most of the advantage of saving for retirement comes from) but the more you can save now the better. The other thing you should look at doing, if you aren't already, is paying off your debts (credit cards, student loans, cars, etc). The quicker you can do that the more money you can start dedicating to savings/retirement.
Old 06-06-15, 09:55 PM
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Re: What's the difference between a 401k and an IRA?

I actually don't have any debt at all. I don't use an actual credit card. I just have a credit/debit card connected directly to my bank account. My car is fully paid for.

I just make $1500 per month post-tax, and my necessities are about $1400 per month.

My monthly cost breakdown:

$650 for rent
$200 for food
$50 for gasoline
$100 for utilities
$60 for internet
$30 for a basic "dumb" phone
$15 for Netflix/Hulu
$100 for health insurance
$100 for car insurance and AAA and maintenance/oil changes/etc
$100 for misc. stuff like haircuts, clothes, basic crap like soap, toothpaste, laundromat, etc.

That's $1400 per month, which leaves me $100 for everything else that isn't a "necessity." I try to save as much of that $100 for a "rainy day" as I possibly can, but I occasionally like to splurge on a Blu-ray or video game or whatever. I live pretty frugally. I don't have a smartphone. I rarely eat out. I don't have cable TV. I use Netflix/Hulu instead. I wait for Blu-rays and video games to go on sale before I buy them; I never pay full price for any of them. My car is an old POS, but it is paid for and it gets me from A to B. I honestly don't mind living frugally because I'm not a material possession kind of person, but I just worry about having enough for the future sometimes.
Old 06-06-15, 10:08 PM
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Re: What's the difference between a 401k and an IRA?

Just sell your comics when you're ready to retire. Oh wait...
Old 06-06-15, 10:15 PM
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Re: What's the difference between a 401k and an IRA?

Originally Posted by Trevor View Post
Just sell your comics when you're ready to retire. Oh wait...
I wondered if anyone would bring that up. Like I said in that thread though, I didn't have any valuable comics. My collection was all junk from the 80s and 90s. If I actually did have any valuable comics, I certainly would have sold them instead of trashing them.
Old 06-06-15, 10:39 PM
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Re: What's the difference between a 401k and an IRA?

cool... sounds like you got a great sense of what you are spending money on and living within your means. Frankly that puts you a step ahead of a LOT of people. Now you just need to start working on that retirement/long term savings. (BTW do you have an emergency fund?) While that $100/mn may not seem like much starting w/ at least that will be something. The trick is going to be as you get the better jobs/raises to try and stay frugal w/ your expenses and not get carried away. For example any bonuses/tax refunds you get can start going to the retirement fund.
Old 06-06-15, 10:47 PM
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Re: What's the difference between a 401k and an IRA?

Originally Posted by kgrogers1979 View Post
Thanks for the help. So the main difference between a traditional IRA and a ROTH IRA is the former is pre-tax and the latter is post-tax? Wouldn't it basically be a guessing game which is better since you can't really predict whether taxes will be higher or lower in the future? Also, how much trouble am I in with being 36 years old and not having saved anything for retirement yet? I figure there's no way I will ever retire at 65, but maybe 70 or is that too optimistic?
Coincidentally, I just attended a retirement planning course today.

It's great you're thinking about it and looking into it. Never too late to start.

Traditional IRA vs ROTH IRA is a great question. You're right about pre-tax and post-tax being one of the main differences. But remember, as nemein mentioned also, another difference is that ALL growth and distributions from the ROTH IRA is tax-free. Think about that: all the capital gains, dividends, interest etc you earn in that ROTH IRA account from now until you're eligible to take the money out will be tax free. 25 years can net you some decent compounding too. It's true you won't know what the tax situation is going to be when you retire, but if your tax rate is not so high right now, the ROTH seems like a more logical choice because your post-tax dollars isn't costing you a whole lot.

But foremost, think about if you can set aside that money for those plans. If you have that little left, you might want to set aside a "rainy day" fund first in case of catastrophic emergencies. Otherwise, you will need to pay a penalty for taking your money out early from the IRAs (though with the ROTH IRA, maybe you can take the principle out early without penalty.... not sure about that).
Old 06-07-15, 08:10 PM
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Re: What's the difference between a 401k and an IRA?

Originally Posted by kgrogers1979 View Post
Also, how much trouble am I in with being 36 years old and not having saved anything for retirement yet?
Lots of people are in the same boat or even worse but that doesn't mean you shouldn't worry. You need to start now. Forget about past mistakes and go online to Vanguard or Fidelity and open a Roth IRA. Save up the $1,000 minimum and put it in the Vanguard Target Retirement 2035 fund or one of Fidelity's equivalent Target Retirement Index funds (NOT the the Fidelity Freedom Target Retirement Funds). Then just keep shoveling money in*

Roth IRA's are great and absolutely make sense for someone like yourself. You sound dirt poor and aren't paying hardly any federal taxes anyway. So if you can save, do it in a Roth.

If you end up getting that job take advantage of any match they give for tax-deferred savings, but any additional saving you can do, put it in the Roth.

*Roth IRA is currently capped at $5,500 a year and you must have earned income to contribute.

If you are really serious about saving and investing do yourself a favor and go to www.bogleheads.org and read the getting started wiki and watch all of the short videos. Then post your questions on the forum.
Old 06-07-15, 09:10 PM
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Re: What's the difference between a 401k and an IRA?

Since you've already gotten some useful answers, I'll just add:

One of them really hates the English.
Old 06-07-15, 09:20 PM
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Re: What's the difference between a 401k and an IRA?

I sell 401(k) plans for a living, so feel free to PM me if you need any additional info.
Old 08-14-15, 11:09 AM
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Re: What's the difference between a 401k and an IRA?

I'll post this here, rather than start a new thread.

I just got offered a new job this week. My current job offers a 401k (through Vanguard), while the new company offers a traditional IRA.

I currently have a Roth IRA. Would I be better off rolling my 401k into my Roth, or waiting to put it in the traditional IRA (I have to be employed there for a year before I'm eligible for it)?

The 401k has about $60,000 in it, the Roth only has about $3,000.
Old 08-14-15, 01:36 PM
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Re: What's the difference between a 401k and an IRA?

Originally Posted by majorjoe23 View Post
I'll post this here, rather than start a new thread.

I just got offered a new job this week. My current job offers a 401k (through Vanguard), while the new company offers a traditional IRA.

I currently have a Roth IRA. Would I be better off rolling my 401k into my Roth, or waiting to put it in the traditional IRA (I have to be employed there for a year before I'm eligible for it)?

The 401k has about $60,000 in it, the Roth only has about $3,000.
Don't roll it into the Roth IRA. If you do that, you will have to pay the taxes on the 60K this year. You should roll it into a regular IRA. Open a new IRA at your bank or online. Try to find one with low or no fees. If you want to combine your personal IRA with the one from your company next year, you might be able to do that, but there's not much advantage to it. The one at your new company is probably a 401(k) anyway and they may not let you add your other money (old 401(k)) to it.
Old 08-14-15, 02:10 PM
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Re: What's the difference between a 401k and an IRA?

Originally Posted by majorjoe23 View Post
I'll post this here, rather than start a new thread.

I just got offered a new job this week. My current job offers a 401k (through Vanguard), while the new company offers a traditional IRA.

I currently have a Roth IRA. Would I be better off rolling my 401k into my Roth, or waiting to put it in the traditional IRA (I have to be employed there for a year before I'm eligible for it)?

The 401k has about $60,000 in it, the Roth only has about $3,000.
Vanguard is pretty decent in terms of low fees and decent fund management (but you should still do some research for your own benefit!). The simplest option, assuming you're comfortable with Vanguard, would be to contact them, explain the situation, and ask them to assist you in creating a new individual IRA account. When you leave your current employer, you would then get a distribution from them out of your 401K. You would have the option of rolling that distribution into an individual IRA, or simply keeping the funds and paying some significant penalties and taxes on that money. Clearly, you want the rollover option. IIRC, it is pretty important how you handle this process. For example, if you get a check from your existing 401K, and cash that check, and then deposit the exact amount into your IRA, it is not considered a rollover, because the money was in your hands for a brief period of time. So you would have to pay all of the taxes and penalties. That is why I'd ask Vanguard (or whatever service you select for your IRA) to assist you with the process.

Once you get the funds into the individual IRA, you can open a Roth IRA within that same account. You can then incrementally shift IRA funds into the Roth IRA over time. You will still have to pay the taxes on those funds, for the tax year in which you perform the transfer, but no penalties. So, for $60K, you can transfer $2K a year, effectively increasing that years income by $2k. If you are in the 15% tax bracket, that will increase your tax liability for the year by $300. Much easier to manage than a single year $60K bump in income, which would not only increase your tax liability based on the $60K, but probably bump you into a higher bracket, so you liability on your regular income would also be increased, say from 15% to 18% (just as an example). I'm doing this now, converting a $30K IRA (from a previous employer) into a Roth IRA. I've adjusted my withholding with my current employer to take an extra $20 a week, so come tax time, I should be fairly even. I could just budget and save that cash for when I file, but I don't trust myself, would rather give it up now than get caught owing $1000 in April.
Old 08-14-15, 02:31 PM
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Re: What's the difference between a 401k and an IRA?

Originally Posted by kgrogers1979 View Post
I actually don't have any debt at all. I don't use an actual credit card. I just have a credit/debit card connected directly to my bank account. My car is fully paid for.

I just make $1500 per month post-tax, and my necessities are about $1400 per month.

My monthly cost breakdown:

$650 for rent
$200 for food
$50 for gasoline
$100 for utilities
$60 for internet
$30 for a basic "dumb" phone
$15 for Netflix/Hulu
$100 for health insurance
$100 for car insurance and AAA and maintenance/oil changes/etc
$100 for misc. stuff like haircuts, clothes, basic crap like soap, toothpaste, laundromat, etc.

That's $1400 per month, which leaves me $100 for everything else that isn't a "necessity." I try to save as much of that $100 for a "rainy day" as I possibly can, but I occasionally like to splurge on a Blu-ray or video game or whatever. I live pretty frugally. I don't have a smartphone. I rarely eat out. I don't have cable TV. I use Netflix/Hulu instead. I wait for Blu-rays and video games to go on sale before I buy them; I never pay full price for any of them. My car is an old POS, but it is paid for and it gets me from A to B. I honestly don't mind living frugally because I'm not a material possession kind of person, but I just worry about having enough for the future sometimes.
You have somewhat a budget...I would step up and take a Dave Ramsey course for 6 weeks and learn more.
Old 08-14-15, 02:37 PM
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Re: What's the difference between a 401k and an IRA?

Since I was too busy killing Whitney Houston, Luther beat me to the Dave Ramsey advice.

Yes, it is too late to think about retirement. At this point you should invest your money into Thai lady-boy hookers and lots of drugs. Don't settle though, go for the hard and heavy stuff that is cut using battery acids and strychnine. Then you really won't need to worry about retirement and will actually enjoy your money.

Does anybody here have a pension plan available to him/her?
Old 08-14-15, 03:00 PM
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Re: What's the difference between a 401k and an IRA?

Originally Posted by Abob Teff View Post
Does anybody here have a pension plan available to him/her?
My position had a pension, but no one in the company seemed to be aware of it until it was announced in 2009 that it was doing away with it and we would get a frozen lump sum at the time of retirement.

Mine was frozen at about $9,000 total. I'm curious what will happen with that, since I'm leaving, but our HR person is out of the office until Monday.
Old 08-14-15, 03:03 PM
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Re: What's the difference between a 401k and an IRA?

Originally Posted by Abob Teff View Post
Does anybody here have a pension plan available to him/her?
My employer still has a pension. Not a giant one, but I'll take whatever I can get.
Old 08-14-15, 03:26 PM
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Re: What's the difference between a 401k and an IRA?

Max out that 401K, if you can. Especially if your employee matches contributions. Free money, man. It don't get much sweeter than that.

I've been contributing into mine for nearly 20 years now. Out of sight, out of mind, and a sweet cushion for retirement. Which should be in another 12-15 years, if all goes well.
Old 08-14-15, 03:37 PM
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Re: What's the difference between a 401k and an IRA?

Originally Posted by Abob Teff View Post

Does anybody here have a pension plan available to him/her?

I've been freelance for the last 4 years, but one of my employers (the NFL) gave me a pension. I have a little over 5 grand at 20% vested. Next May I'll be 40% vested.

I had another pension with my old job, but I spent it to pay off some expenses/debt after I got laid off 4 years ago. I paid a very dear price for spending it tax time.

I also have a 401K plan with my other employer (the Pac-12 conference) I have almost $50K in there mostly transferred from my old job.

I think I'm in decent shape for retirement. I have a little bit of debt (mostly from some obscene home repairs that my parents needed help with), but I try to live within my means and not spend stupid money.
Old 08-14-15, 06:16 PM
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Re: What's the difference between a 401k and an IRA?

Originally Posted by Abob Teff View Post
Does anybody here have a pension plan available to him/her?
Yup. I'll take the lower pay early in my career for guaranteed income for the rest of my life once I retire.
Old 08-14-15, 06:46 PM
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Re: What's the difference between a 401k and an IRA?

I have a pension and a 457 plan.
Old 08-15-15, 02:22 PM
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Re: What's the difference between a 401k and an IRA?

Originally Posted by Abob Teff View Post
Does anybody here have a pension plan available to him/her?
I do. It is one of the few benefits left of being a state worker. I am in Tier 4 of the NYSLRS. I'll be seeing at least 60% of my annual salary after I retire.

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