Understanding the Differences Between 401(k), IRA, and Roth IRA Plans with Financial Advisors like Lon Faccini

Retirement planning is an essential aspect of securing financial stability in the future. Among the most common tools available to individuals in the United States are the 401(k), Traditional IRA, and Roth IRA plans.

Each of these retirement accounts offers unique benefits and features that can significantly impact how your savings grow and when they can be accessed. Understanding the differences between these plans is crucial to making informed decisions about your retirement.

The 401(k), IRA, and Roth IRA are all tax-advantaged accounts, but they differ in terms of contribution limits, tax treatment, and eligibility requirements. Depending on your income, tax bracket, and retirement goals, one plan may be more beneficial than another.

This blog will explore the key features of each plan, providing clarity on how they work and how they can help you build wealth for retirement. By the end of this blog, you will have a clearer understanding of these retirement accounts, enabling you to choose the one that best aligns with your financial goals and retirement needs.

What is a 401(k)?

The 401(k) plan is a retirement account offered by employers to their employees. It allows workers to contribute a portion of their pre-tax salary, reducing their taxable income for the year. Contributions grow tax-deferred, meaning taxes are paid upon withdrawal during retirement.

Employers often provide matching contributions, which can significantly boost an individual’s retirement savings. Financial advisors like Lon Faccini mention that the matching contributions are typically a percentage of the employee’s contribution, which can be a major benefit to taking full advantage of a 401(k) plan.

However, 401(k) plans come with annual contribution limits, which are higher than those of IRAs. Additionally, the funds in a 401(k) are usually limited to a selection of investment options chosen by the employer, which may affect the flexibility of your investment strategy.

What is an IRA?

An Individual Retirement Account (IRA) is a personal retirement plan that allows individuals to save for retirement with tax advantages. Contributions to a traditional IRA may be tax-deductible, and the funds grow tax-deferred until retirement, at which point withdrawals are taxed as ordinary income.

IRAs are set up and managed by individuals, offering more flexibility than a 401(k) in terms of investment options. You can choose from a wide range of stocks, bonds, mutual funds, and other securities. This flexibility allows you to tailor your investment strategy according to your financial goals.

The contribution limits for an IRA are lower than those for a 401(k), and there are income limits that determine whether you can deduct contributions from your taxes. Despite these limitations, IRAs remain a popular choice for many investors due to their simplicity and control over investments as highlighted by professionals such as Lon Faccini.

What is a Roth IRA?

A Roth IRA is similar to a traditional IRA in many ways, but with key differences. The primary distinction is that contributions to a Roth IRA are made with after-tax dollars, meaning you do not receive a tax deduction when you contribute. Financial advisors including Lon Faccini convey that the funds in a Roth IRA grow tax-free, and qualified withdrawals in retirement are also tax-free.

One of the main advantages of a Roth IRA is that, unlike traditional IRAs and 401(k)s, you can withdraw your contributions (but not your earnings) at any time without penalties or taxes. This provides flexibility in case of emergencies or changes in your financial situation.

Roth IRAs have income limits that restrict high earners from contributing directly to the plan. However, there are strategies, such as the “backdoor Roth IRA,” that allow individuals to circumvent these limits. Additionally, the contribution limits for Roth IRAs are the same as those for traditional IRAs.

Tax Differences Between 401(k), IRA, and Roth IRA

One of the most significant differences between these retirement plans is the way they are taxed. Contributions to a 401(k) are made with pre-tax dollars, meaning you reduce your taxable income for the year. However, withdrawals in retirement are taxed as ordinary income.

In contrast, contributions to a traditional IRA are often tax-deductible, and the earnings grow tax-deferred until you withdraw them. Similar to a 401(k), withdrawals from a traditional IRA are taxed as ordinary income. However, the key difference is that IRAs are individual accounts, which means you have more control over your investment choices.

The Roth IRA, on the other hand, operates under a different tax structure. While you contribute with after-tax dollars, your withdrawals in retirement are entirely tax-free, as long as you meet certain conditions. This tax-free growth makes the Roth IRA a highly attractive option for individuals who expect to be in a higher tax bracket during retirement as underlined by professionals such as Lon Faccini.

Contribution Limits and Eligibility Requirements

Each of these retirement plans has different contribution limits and eligibility requirements, which can impact your ability to contribute to them. For the 401(k), the contribution limit is significantly higher than that of an IRA. In 2025, individuals can contribute up to $22,500 to a 401(k), with an additional catch-up contribution of $7,500 for those aged 50 and older.

IRAs, whether traditional or Roth, have a lower contribution limit, typically $6,500 in 2025, with an additional $1,000 catch-up contribution for those over 50. However, traditional IRAs may have income limits for tax-deductibility, and Roth IRAs have income limits for eligibility to contribute directly.

It’s important to consider these limits when planning your contributions, as they can affect how much you can save each year. Financial advisors like Lon Faccini express that certain income thresholds may impact your ability to contribute to a Roth IRA or deduct contributions to a traditional IRA, so it’s essential to stay informed about these limits each year.