1 Key Differences Between a 401(k) and an IRA You Need to Know Before Saving More Money for Retirement

There are several key differences between a 401(k) and an IRA. Some of them are pretty well known.

One key difference is investment flexibility. With your employer’s 401(k), you are typically limited to a small “menu” of investment funds. That might be fine if you want to invest on autopilot in retirement, but an IRA allows you to invest in just about any stock, bond, mutual fund, or exchange-traded fund you want. If you want to save some of your retirement money nvidia (NVDA -1.72%) For example, stocks are available through an IRA.

Some differences between a 401(k) and an IRA may not be well known, but are very important to understand. One of the biggest differences is how early you can access these accounts.

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Use your retirement savings early

In most cases, you should leave your 401(k) and IRA savings until age 59 1/2. Although both have some exceptions very different.

For 401(k)s, there are several reasons why early withdrawals are allowed without penalty. Most notably, there is a “discontinuation of service” exception. What this means is that you can take the money out once you are no longer working for the employer who sponsored the plan and are over age 55.

On the other hand, there are two types of IRAs: big Exceptions that do not apply to 401(k)s:

• You can withdraw up to $10,000 from your IRA and use it to buy your or someone else’s first home.
• You can withdraw the money at any time to use it for higher education expenses. Many parents use IRAs to save for college and then use the remaining money to fund retirement.

Overall, an IRA is more flexible than a 401(k) in terms of investment flexibility and early withdrawals. Even if you have a 401(k) or similar plan at work, it may be wise to supplement it with an IRA. Of course, that’s only after you’ve maxed out your employer’s matching contribution.