Difference Between Similar Terms and Objects

Difference Between 401k and Roth IRA

401k vs Roth IRA

The 401k and Roth IRA are different individual retirement plans. As with all retirement plans, the 401k and Roth IRA have certain distinctive features. It is therefore important that retiring persons should always weigh these features before making a decision.

The 401k was the first of the two plans to be introduced and was available in 1978. 401k, which are also called Elective Deferrals, are a scheme in which the employer contributes matching funds toward the employee’s retirement account. The Roth IRA was introduced in 1998. It is a plan in which the self-employed, employed or individuals, contribute voluntarily to a scheme.

Under the 401k plan, the contributions are pre-tax earnings, while under the Roth IRA, the individual’s contributions are post tax earnings. There are certain limitations to the individual contributions that can be made to the Roth IRA unlike the 401k plan.

The 401k can also be considered a plan that is set up by an employer while the Roth IRA could be considered as an employee initiated scheme.

With regard to the withdrawal of funds; an employee under the 401k scheme can start withdrawing funds only after the age of seventy and half years, unless he is employed still. With the Roth IRA, the same age as that of 401K is applicable but the only difference is that there is no restriction on the working status.

Loans are available under the 401K but, but not with a Roth IRA. A person who has joined the Roth IRA plan can withdraw money for higher education for his children, grandchildren or for himself. The 401K retirement plan does not allow for the withdrawal of funds for higher education in the last year of service. If withdrawn, the funds are subjected to a ten percent penalty.

With a Roth IRA, the contributor has a better control of his investments, unlike the contributor to a 401k, whose investment decisions are made on his behalf.

Summary

1. It was in 1978 that the 401 k was introduced. The Roth IRA was introduced in 1998.
2. The 401k can also be considered a a plan that is set by an employer while the Roth IRA could be considered as employee initiated.
3. Roth IRA contributors have a say on their investments unlike contributors to a 401k plan.


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