Entering the world of retirement planning is like taking a well-trodden path that's nevertheless unfamiliar to you. It can feel overwhelming—but not after you get these basics of IRAs and 401(k)s under your belt.

What’s the Difference Between an IRA and a 401(k)?

The IRA (Individual Retirement Account) and 401(k) are two types of retirement plans. Depending on your employment status, you may have access to one or both of these.

How IRA and 401(k) Are the Same

The 401(k) and Traditional IRA (not the Roth IRA) are tax-deferred retirement accounts. This means you don't pay taxes on the money you put in the account.

This can result in significant savings on your income taxes. However, you will pay taxes on the contribution money—and earnings—when you choose to withdraw the funds.

You can invest the money in stocks, mutual funds, bonds, or the money market—all with different risk levels. Greater risk often comes with greater reward—but wider up and down balance swings which may be uncomfortable. So, consider your risk tolerance, especially as you approach retirement.

What Is a 401(k)?

Your employer sets up a 401(k). To contribute, you simply tell their payroll department what percentage of your pay you want to contribute each pay period. And they do the rest.

Your employer will typically give you a set of funds you can choose to invest in depending on your investment goals—which may change as you get closer to retirement and want to reduce risk.

Employers will often match your contributions into the 401(k) up to a certain percentage of your income. This is "free money" and part of your employment package. You get to keep it even if you leave the company after a certain period. So, if you can, it's generally a good idea to at least invest up to what your employer matches.

In 2025, you can contribute up to $23,500 per year (or $31,000 if 50+) of your earned income. And that's doubled if you're married and filing jointly.

Your employer's payroll department will subtract your contributions from your taxable income so you usually don't have to report 401(k) contributions on your tax return.

What Is an IRA?

An IRA is a retirement account that you open and manage yourself. This gives you more flexibility in your investments compared to the 401(k). You can often buy and sell individual stocks you can't access in a 401(k).

You can open an IRA through a financial institution like a bank, credit union, or stock brokerage firm. In 2025, the contribution limit is $7000 per year (or $8000 for 50+). And that's doubled if you're married and filing jointly.

You contribute through the financial institution's portal by attaching your bank account. Once the money clears, you can research and invest it as you see fit within the account.

IRAs are of two sorts.

The Traditional IRA (also called Contributitory IRA) is a tax-deferred IRA. Remember: that means you don't pay taxes on the money you contribute but do when you withdraw it later.

For a traditional IRA, you must report how much you contributed to your IRA on your annual tax return to get the tax-deferred benefit you're entitled to. Note: this is an above-the-line deduction. This means even if you take the standard deduction, you can still deduct these contributions from your income.

A Roth IRA works a little differently. You pay taxes on the money that goes into your ROTH account, so you don't get the tax savings now. But when you withdraw money from a Roth after 59 1/2, you don't have to pay taxes on any money you withdraw.

Roths are also unique in that you can withdraw your contributions (but not the earnings) at any time without penalty because you already paid taxes on that money. There are also other advantages that we can't fully detail in this post.

Withdrawing from Your Retirement: Use Caution

You can withdraw from your retirement at any time, either through your employer's payroll department or through the financial institution. After retirement, you may be able to set up auto withdrawals that go straight to a bank account.

However, if you pull money out of a Traditional IRA or 401(k) before you turn 59 1/2, you will have a 10% penalty on the funds withdrawn and have to pay taxes on the money, too, because it was tax-deferred. For Roth, it's just the 10% penalty if the withdrawal doesn't exceed contributions.

To avoid this, have an emergency fund separate from your retirement and only withdraw money from it early as a last resort.

Build Your Future Wisely

There you have it. Start small, stay consistent, and your nest egg will grow over time—leaving you with peace of mind and a brighter future.