As our team focuses on retirement income, people often ask us the difference between an IRA (Individual Retirement Account) and 401(k), 403(b), or TSP (Thrift Savings Plan). The best place to start is how they are similar. Both of them are tax deferred savings vehicles where one does not pay tax on contributions and gains but pays taxes when they withdraw the money or what is called the distribution.
Most people accumulate money inside their company retirement accounts like 401(k), 403(b), and TSP. The main reasons are:
(1) it gets taken out automatically out of our paycheck
(2) we can contribute more and
(3) a lot of time the organization provides a match.
Typically, when one leaves their place of employment either through job change or retirement, they have choice whether to keep in company retirement plan or move to an IRA.
As an FYI, 401(k) is for profit organizations typically while 403(b) is for non-profit. They are very similar in how they work and their names derive where they are in the tax code.
Moving to an IRA typically does not cause a taxable event. One of the main reasons people typically do this is for greater choice. They are not limited to options of the retirement plan and can use a whole universe of publicly traded investment options. The following article gives some additional reasons one would use an IRA over 401(k).
If you have any questions, please reach out to our team or your financial service professional.