401K vs. IRA: Benefits and Differences for Smart Retirement Planning in 2024

401k vs IRA

As an individual and a business owner, the choices you make today will significantly impact your future, the future of your employees, and the future of your business. This is especially true when planning for retirement and making decisions about benefits. One such choice is determining which type of plan—401K or IRA—is best for you and your employees.

Sure, both options can build wealth for retirement. But understanding the details of each plan type—like contribution guidelines and tax treatment—is crucial before making this important decision.

Keep reading to learn how each type of plan works and what questions to ask, so you can make the best decision and maximize your savings and earnings over time.

❓ 401K vs. IRA: What’s the Difference?

A common retirement savings plan offered by employers, a 401K plan enables employees to save for retirement. The participant chooses how much they’d like to invest, and that money is automatically deducted from the paycheck and transferred to the 401K account.

An IRA is an individual retirement savings account that you can open and manage on your own.

The key differences are that IRAs typically offer more investment options, but 401Ks allow you to contribute more each year.

💡 Considerations for an Important Decision: 401K vs. IRA

IRAs are popular with small business owners, but 401K plans can be the right fit for some e-commerce businesses. To make the right choice for you and your business, start by considering the following:

Contribution guidelines. IRAs cap employee contributions at lower amounts than 401K plans.

  • 👉 401K: In 2024, you can invest up to $22,500 a year in a 401K, not including any employer match. And for those 50 and over, you can add an additional $7,500 per year.
  • 👉 IRA: The contribution limit for a traditional IRA in 2024 is $7,000. Those 50 and older can tack on an additional $1,000.

💡 Control and investment options

Because an IRA has no plan administrator to choose (and limit) the investment options, participants have more control and more variety when it comes to investment options.

📑 Tax treatment of contributions

401K: Your contributions lower taxable income in the year they are made.

IRA: Contributions may be deductible.

📑 Employer matching contributions.

Both retirement plan options can help your business attract and retain top talent, but with a 401K plan, you can offer an employer match.

❓ Begin Asking the Right Questions

To optimize your retirement planning while you are building your business, you need to understand some complicated issues. These issues involve things like:

  • ❓ Legal and fiduciary requirements
  • ❓ Income break-even points
  • ❓ If and when it makes sense to match employee contributions
  • ❓ Whether you need a plan administrator
  • ❓ How to roll over a 401K to an IRA

Asking the right questions about your particular situation is important for you, your employees, and your business. For example, did you know that an individual 401K plan can maximize retirement savings if you’re a business owner with no employees other than your spouse?

And, of course, 401Ks and IRAs are not the only options out there…

Based on your cash flow situation, the number of employees you have, and a variety of other factors, there may be options you’ve never even considered—like the SEP-IRA. This simplified employee pension plan has generous contribution limits and opens up the potential for tax deferrals.

Dig into Your Wealth-Building Options with the Right CPA Accounting Firm

Whether you’re just getting started or need help optimizing your current strategy, making the right decisions is easier when you have a financial expert on your side.

Building a comfortable future for yourself, your family, and your employees begins with a plan. Our year-round wealth management experts analyze tax structure, risk tolerances, estate considerations, and financial goals to deliver a clear course of action so you can build and protect your wealth.

While many accounting firms can take care of your business, they don’t necessarily consider building personal wealth for business owners or employees. Only Insogna CPA looks at you and your business holistically so that you can build wealth while you grow your business.

Get answers to your questions and confidently explore retirement plan options that are right for you, your business, and your employees.


Insogna CPA