The Differences Between a 401(k) and IRA | Cleveland Bradley County Teachers’ Federal Credit Union

If you are hoping to increase your overall financial health and set yourself up for a strong future, investing in your retirement savings is one of the best places to start. The earlier you start investing in retirement, the better off you will be—and thanks to compounding interest, even small contributions can grow significantly over time.

As you begin to research your retirement savings options, you will likely see the terms IRA and 401(k) thrown around most often. These are two accounts that essentially accomplish the same thing (saving for retirement), but have different pros and cons you should consider when deciding where to put your money—which is what we will be discussing below.

What Is a 401(k)?

A 401(k) is a tax-deferred retirement savings account that is offered by an employer. Employees are able to contribute to their 401(k) account directly via paycheck withholding, meaning they are contributing a percentage of their pre-tax income to the fund—which is a smart way to save!

Additionally, most employers offer some sort of 401(k) matching program, where they will match up to a certain amount that employees put into their funds.

What Is an IRA?

The acronym IRA stands for an Individual Retirement Account, which is exactly what it sounds like. An IRA typically gives people more freedom with what they are investing the funds in, but any contributions are made post-tax and will not be matched by employers.

Should I Use a 401(k) or IRA?

If you work for a company that offers 401(k) matching, it is typically advised that you make the maximum contribution to your 401(k) that your employer will match—so if they match up to 6%, you should contribute at least 6% if you are able in order to take advantage of the free money they are offering.

However, if you do not work for a company that offers matching, or you are already maxing out your contribution to your 401(k), moving the rest to an IRA might be a smarter choice. IRAs do have annual contribution limits, but you can claim your contribution to them on your taxes and potentially receive a credit at the end of the year for feeding into them.

Curious about what retirement account is right for you? We can help you navigate them! From IRAs to CDs and more, we can help you get on the right track. Come see us today for more info.