2020 and 2021 contribution limit |
| $19,500 for those under age 50; $26,000 for those age 50 and above. | $6,000 as a combined IRA limit; $7,000 for those age 50 and above. |
Setup and funding |
| Employee enrolls in plan set up by employer. Funded via automated payroll deduction. | Set up and funded by individual through a financial institution. |
Key pros |
Employer match, if offered.
High contribution limit.
Eligibility is not limited by income. | Large investment selection.
If deductible, contributions lower taxable income in the year they are made. | Qualified withdrawals in retirement are tax-free.
Contributions can be withdrawn at any time. |
Key cons |
No control over plan and investment costs.
Limited investment choice.
Distributions in retirement are taxed as ordinary income, unless a Roth 401(k).
| Contribution limits are lower than a 401(k).
Deductions may be phased out.
Distributions in retirement are taxed as ordinary income. | Contribution limits are lower than a 401(k).
No immediate tax benefit for contributing.
Ability to contribute is phased out at higher incomes. |
Early withdrawal rules |
| Unless you meet an exception, early withdrawals of contributions and earnings to a regular 401(k) are taxed (in a Roth 401(k), only earnings are taxed) and subject to a 10% penalty. | Unless you meet an exception, early withdrawals of contributions and earnings are taxed and subject to a 10% penalty. | Contributions can be withdrawn at any time, tax- and penalty-free.
Unless you meet an exception, early withdrawals of earnings may be subject to a 10% penalty and income taxes. |