So what’s the difference between 401k and IRA? Deciding how to pay for your retirement can be a tricky decision. Not only are there a lot of options available, but it is also hard to keep all of the different plans separate from each other. This article will go over the basic differences between 401k and IRA. Knowing the difference between these two retirement savings programs will put you ahead of many adults out there who are trying to decide how to fund their retirement.

Many people think that the main difference between 401k and IRA is the way the money is deducted. In reality, the way the money is deducted is essentially the same for both plans. With a 401k plan, the money is automatically taken out of your paycheck and put directly into your retirement savings. With an IRA, you actually declare the amount of money you want to contribute by using your Form 1040. The amount you decide on is then subtracted from your taxable income. If you are having trouble seeing the difference between the 401k and the IRA at this point, you are not alone. When it comes to deductibility, there really is no difference.

Most of the other differences between 401k and IRA are much more obvious. One of the most important differences has to do with how the money is sponsored. In a 401k, the employer almost always sponsors the account for you. In an IRA however, the account-holder is responsible for opening, funding, and running the account. That is what the “I” in IRA stands for. You, the individual, take care of everything on your own.

Another important difference between 401k and IRA that you should be aware of deals with pre-tax dollars. In a 401k, whatever is put into your account is subtracted from your pay before you pay taxes. This way, you pay no taxes, at least not until you start withdrawing money. An IRA, on the other hand, gives you a little bit more control over when you pay the taxes. Traditional IRAs work much like a 401k does, but a Roth IRA is the complete opposite—you are taxed on the contributions now, but you don’t have to pay taxes after you start withdrawing money.

The easiest way to remember the difference between 401k and IRA is to remember who has the control. In a 401k, your boss is in charge—they initiate they plan, they decide what investments you will be able to access, and they take care of the day-to-day management of the account. In an IRA, you are in charge—you make all the calls—your boss has nothing to do with your retirement savings whatsoever.

People often ask if it is possible to have both an IRA and a 401k. The answer to this is yes; however, it depends on your situation. If you do qualify for both an IRA and a 401k, you most definitely want to take advantage of it. After all, who doesn’t want free money? And that, you see, is the difference between 401k and IRA.