There are a number of differences between an Individual Retirement Account (IRA) and a 401(k) plan. The biggest one is who can have a 401(k) plan and who can have an IRA. Only a business can “sponsor” a 401(k) plan, while an IRA is available without any sponsorship. The other major difference is the contribution amounts. An IRA only allows contributions up to $5,000 a year ($1,000 if you are 50+ years of age), and a 401(k) plan allows participant contributions up to $19,500 ($6,500 if you are 50+ years of age) and an employer has the possibility of adding a matching contribution AND profit-sharing. In other words, it is possible (through specific calculations) to contribute up to $57,000 ($6,500 if you are 50+ years of age for $63,500) for a participant.
The benefits of a 401(k) plan also benefit an employer that puts in an employer contribution (match and/or profit-sharing). These contributions are pre-tax, which can help reduce the tax burden on a business all while benefiting employees participating.
Recently with the SECURE Act (most provisions effective 1/1/2020) a business can claim 50% or up to $5,000 in costs related to the setup of their 401(k) plan each year for three years. Also, if a business add an auto-enrollment provision there is an additional $500 tax credit each year for the business (this can be claimed each year).
A 401(k) plan must have a IRS-approved plan document along with a fiduciary/trustee named in that document. Luckily for you 401GO helps get that whole thing set up for you easily without you having to worry about all the specifics. No really, if you have questions we can simplify this whole thing for you.
So, quick summary, a 401(k) plan can only be offered through a business and an IRA for an individual. 401(k) plan is good for a business and employees. An individual without a business or employed by a business that sponsors a 401(k) plan would be able to have an IRA and wouldn’t be able to have a 401(k) plan.