As the title says, what’s the difference? It can be confusing. Thanks.
In: Economics
A 401k is an employer-sponsored retirement plan where contributions are pre-tax, meaning you pay taxes on withdrawals. A Roth IRA, on the other hand, is individually opened and uses post-tax contributions, so withdrawals are tax-free. Essentially, you pay taxes now with a Roth IRA or later with a 401k. Both have specific contribution limits and rules.
401k pay tax later, Roth IRA pay tax now. Roth can be better if you think you’ll be in a higher tax bracket when you retire/pull out
**401k:** Retirement account thru your employer, sometimes they add in money too.
**IRA:** Retirement account you open yourself, has much lower allowed contribution (>3x lower).
**Traditional:** Deduct contributions from annual income and pay the taxes when you withdraw.
**Roth:** Pay the income taxes now and withdraw with no additional taxes owed.
For an IRA there are income restrictions for Roth and then depending if you have a 401k at work then Traditional also has income restrictions.
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