When it comes to saving for retirement, two popular vehicles are the 401(k) (nonprofit workers, teachers, government workers typically have a 403(b)) and an Individual Retirement Account (IRA).

However, when faced with the choice between the two of them, how do you know which is best for your situation?

PNC compares the two areas such as eligibility to contribute, annual contribution limits, access to assets during employment and taxability of withdrawals.

Plan Types

  401(k)/403(b) Individual Retirement Account (IRA)
Eligibility to contribute

Your employer may offer a plan; participation is subject to plan rules.

Traditional

You or your spouse have earned income and are under age 70½.

Deductible if:

  • you are not covered by a retirement plan at work, or
  • you are covered by an employer-sponsored retirement plan and are
  1. Single with Modified Adjusted Gross Income (MAGI)[1] < $74,000 (starts phasing out at $64,000)
  2. Married filing jointly with MAGI < $123,000 (starts phasing out at $103,000), or
  3. Your spouse is covered by a retirement plan and you are married filing jointly with MAGI < $203,000 (starts phasing out at $193,000)

Roth

You or your spouse have earned income and are

  • Single with Modified Adjusted Gross Income (MAGI)[1] < $137,000 (starts phasing out at $122,000)
  • Married filing jointly with MAGI < $203,000 (starts phasing out at $193,000)

Annual contribution limit

If eligible, you can contribute to both a 401(k)/403(b) plan and an IRA—the limits listed apply separately.

$19,000, $25,000 if age 50 or older (lesser of limits below or 100% of compensation/earned income). $6,000, $7,000 if age 50 or older (lesser of limits below or 100% of compensation/earned income).
Access to assets during employment

Many plans offer hardship withdrawals; some plans offer in-service withdrawals after age 59½. Many plans also offer loans, which are not subject to taxes or penalties (unless you don’t pay the loan back). All access to your balance is subject to a particular plan’s rules.

You can withdraw any amount at any time. No loan provisions.
Taxability of withdrawals

Traditional

Entire withdrawal subject to income tax, plus 10% penalty if taken before age 59½ (with some exceptions).

Roth Qualified withdrawal:[2] Entire withdrawal tax free.

Non-qualified withdrawal:

  • Contributions: not subject to either tax or penalty.
  • Gains: subject to income tax, plus 10% penalty if taken before age 59½ (with some exceptions).
  • Withdrawals are considered a combination of contributions and gains (that is, you cannot just withdraw contributions).

Traditional

Entire withdrawal subject to income tax, plus 10% penalty if taken before age 59½ (with some exceptions).

Roth Qualified withdrawal:[2] Entire withdrawal tax free.

Non-qualified withdrawals:

  • Contributions: not subject to either tax or penalty.
  • Gains: subject to income tax, plus 10% penalty if taken before age 59½ (with some exceptions).
  • Withdrawals are considered to come from contributions first, then gains.
Employer Matching Contribution Subject to plan rules (for example, 50% on the first 6% contributed). None
Vesting (your right to keep contributions if you leave the company

All the money you contribute is always vested.

Your employer can require you to remain at the firm for a certain amount of time before you get to keep any money they contribute. See your plan’s rules.

None—All the money in an IRA is always vested.
Required Minimum Distributions (RMDs)

Yes[3]

Once you leave your employer, you may roll your Roth 401(k)/403(b) balance into a Roth IRA, which does not require lifetime RMDs.

Traditional: Yes

Roth: No[4]