A 401(k) is a retirement plan in which employees voluntarily participate. In a 401(k), a portion of the employee’s paycheck is taken out and invested before taxes are taken out. Many companies offer some sort of matching plan in which they match all or a portion of the income an employee invests. There is a 10 percent penalty for money withdrawn before 59 1/2 years of age. A 403(b) is the equivalent of a 401(k) for educational employees and nonprofit employees.
IRA stands for “individual retirement account.” In an IRA, an employee makes tax-deferred contributions from his or her paycheck. If the employee is not a member of a company’s pension plan or meets certain income rules, he or she can make tax-deductible contributions. Others’ contributions are not tax-deductible. The main difference between an IRA and a 401(k) is that an IRA is set up by an individual, while a 401(k) is set up by a company.