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Financial literacy is not often taught in academic curricula these days, leaving many confused about investment approaches, retirement savings, and more. With this in mind, this article will highlight the differences between 401(k)s and IRAs—two popular types of retirement savings accounts that have some key distinctions.

To begin, a 401(k) is a retirement savings plan offered by employers. Accordingly, employees can contribute a percentage of their salaries to the investment account. Contributions are typically matched by employers, albeit to a certain percentage. Notably, funds in a 401(k) can compound and grow entirely tax-free until withdrawn (i.e., generally during retirement), at which point they will be subject to income taxes. To contribute to a 401(k), one's company must offer the plan.

Unlike a 401(k), an IRA or "individual retirement account” is a retirement account not associated with one’s employer. The two types of IRAs available are traditional IRAs and Roth IRAs, and there are important distinctions between the two. Specifically, contributions to a traditional IRA may be tax-deductible; however, funds are taxed when withdrawn. Meanwhile, Roth IRA contributions are not tax-deductible, but funds can be withdrawn tax-free in retirement. IRAs are available to anyone, regardless of whether their company offers a retirement plan, making them a wonderful option for many.

Yet another difference between 401(k)s and IRAs is what can be contributed annually (i.e., referring to limits associated with what can be added to each account). For 401(k)s, the maximum contribution is $20,500 in 2022 and will be $22,500 in 2023. There is also an additional contribution option of $6,500 for those 50 and over. For IRAs, the maximum contribution is $6,000 in 2022, with an additional contribution amount of $1,000 available for those 50 and over. Finally, because 401(k)s are offered by employers, they generally have access to more investment options, such as mutual funds and target-date funds. Meanwhile, IRAs are typically more limited with regard to investment opportunities.

Ultimately, both account types are valuable tools for retirement savings. Nevertheless, the one that is right for you will ultimately be dependent on your individual circumstances and goals. As a baseline, remember to consult a financial advisor before making critical financial decisions.