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K vs. IRA: Investment Account Differences and Tax Implications
The key distinctions between 401(k) and IRA investment accounts center around investment options and tax implications. 401(k) plans typically offer limited investment choices, primarily mutual funds and occasionally ETFs, while IRAs allow for a broader range of investments, including mutual funds, ETFs, and individual stocks. Tax treatment differs as well; contributions to traditional 401(k) and traditional IRA accounts are made pre-tax, deferring taxes until withdrawal. Conversely, Roth options (Roth 401(k) and Roth IRA) require contributions from after-tax income, allowing tax-free growth and withdrawals later. For younger investors, Roth accounts may be advisable, as initial tax rates are generally lower, providing an opportunity to pay taxes now and benefit from tax-free growth in the future, especially as income increases over time.