Question

How is a 401k different from an individual retirement account (IRA)?

A 401k is a good long-term investment strategy.
A 401k allows people to contribute before taxes.
A 401k is created by an individual who deposits money.
A 401k is created by an employer who may match contributions.

Answer 1

Briefly — the main differences are who sponsors the account, contribution limits, employer involvement, and some rules about investments and withdrawals.

Quick true/false on your statements
- "A 401k is a good long-term investment strategy." — Mostly true in general: a 401(k) is a common, tax-advantaged vehicle for long‑term retirement saving and often a very sensible part of a plan, but whether it’s “good” for any individual depends on plan fees, investment options, and personal circumstances.
- "A 401k allows people to contribute before taxes." — True for a traditional 401(k): contributions are typically made with pre‑tax dollars (reducing current taxable income). Many plans also offer a Roth 401(k) option, which is after‑tax.
- "A 401k is created by an individual who deposits money." — False. A 401(k) plan is established and sponsored by an employer. Individuals enroll and contribute to the employer’s plan.
- "A 401k is created by an employer who may match contributions." — True. Employers set up the plan and frequently offer matching contributions (which may be subject to vesting).

Other important differences (high level)
- Contribution limits: 401(k) plans allow much higher annual contribution limits than IRAs.
- Who sets it up: 401(k) = employer-sponsored. IRA = opened by an individual at a bank/brokerage. (Note: employer-based IRA variants like SIMPLE or SEP IRAs do exist.)
- Investment choices: IRAs usually give a broader menu of investments; 401(k) choices are limited to the options the employer’s plan offers.
- Employer match and vesting: Employer match is common in 401(k)s and may vest over time; IRAs don’t have employer matches (except employer-funded SEP/SIMPLE IRAs).
- Loans: Some 401(k) plans allow loans; IRAs do not.
- Income-based rules: IRA tax deductibility and Roth IRA eligibility can be limited by your income; 401(k) deferrals are not income‑restricted (but high earners may be subject to nondiscrimination testing or other rules).
- Required minimum distributions (RMDs): Traditional IRAs and traditional 401(k)s have RMDs; Roth IRAs do not have RMDs during the owner’s lifetime (Roth 401(k)s do, unless rolled to a Roth IRA).

If you want, I can compare specific rules (contribution limits, catch‑up amounts, tax/deduction phaseouts) for the current year or help you decide which is better for your situation.