401(k) Vs. IRA - What's the Difference?

The Internal Revenue Service (IRS) Building Sign.
The Internal Revenue Service (IRS) is the primary tax agency in the US.

In the world of finance there are so many complex terms and ideas thatย are difficult toย understand. But that's where we come in! We'll help break down these ideas into digestible chunks so that you can use the knowledge to reach your goals. Today's topic are on retirement plans, specifically 401(k) plans and IRAs. Let's start off with some background definitions.

What's a Retirement Program/Account?

A retirement account or program is simply a way to separate money or savings from everyday spending accounts to be eligible for tax-savings and other benefits. There are many different retirement programs out in the world today and the rules vary for employer-to-employer (if the program is employer sponsored) and across countries. Each country has their own government and there own way of collecting and levying taxes on their citizens. However, a general theme emerges across all country's retirements rules. And that is they want you to save for retirement! Having some type of savings for your future self is incredibly important. There will come a time in your life where not only do you not want to work anymore but that you simply can't work anymore. As we get older, our ability to do tough physical work starts to diminish (As far as we know, we can't live forever yet. Let us know if you know something we don't in the comments below). So it would be great if you saved so much money that you can literally do whatever you want. That's the central idea we're trying to convey here. We all want to get that boat money. Here are a couple ways to help you do that!ย 

What's a 401(k) Plan?

A 401(k) plan is a retirement program that helps employees of companies save for their retirement. The Internal Revenue Revenue (IRS) allows employers to offer 401(k) plans to their employees as an employee-benefit. These plans usually come with great benefits like the ability to defer income taxes until retirement and the ability for the employer (your company) to give you free money.

What's an IRA?

An IRA, or individual retirement account is another retirement program that the IRS allow to receive favorable tax treatment. Unlike 401(k) plans, IRAs are set-up by an individual, not a company. However, just like 401(k) plans, IRAs come with some series tax benefits.

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Disclosure: This article is for informational purposes only. It should not be considered financial or legal advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.

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