Frequently asked questions

IRA vs. 401(k) Accounts

 

What is the difference between a 401(k) and an IRA?

A 401(k) is a retirement savings account that is sponsored by an employer for employees. The interest earned in a 401(k) is not taxed until the funds are withdrawn. Some employers offer matching, or partial matching, to encourage their employees to save.

An Individual Retirement Account (IRA), Traditional or Roth, is a retirement savings account through your bank or other financial institution. An IRA is an excellent option for those who do not have access to an employer-sponsored plan but still want to save for retirement. There are no matching contributions with IRAs.

What is the difference between a Traditional and Roth IRA?

Here are the differences between a Traditional and Roth IRA:

Account Type Traditional IRA Roth IRA

Description

A retirement savings account that allows you to invest pre-tax income

A retirement savings account that allows you to invest after-tax income

Eligibility

Must be younger than 70 ½ years old to open

Eligibility is determined by the IRS and based on your modified adjusted gross income (AGI)

Taxes

Contributions grow on a tax-deferred basis, meaning you will not pay taxes on your earnings until you withdraw your funds. Contributions may be tax-deductible.

Contributions are taxed prior to investment and will grow on a tax-free basis. You will pay no taxes upon withdrawal.

Contributions

Ability to contribute up to age 70 ½

How much you can contribute is determined by IRS guidelines. The amount you can contribute is determined by your filing status and modified adjusted gross income (AGI). To learn more, visit IRS.gov.

Ability to contribute past age 70 ½

Withdrawals

Allows you to withdraw money from your account at age 59 ½. If you withdraw funds before this time, you will be subject to a distribution penalty.

Allows you to withdraw principal from your account at any time without penalty if your account has been open at least five years and you’re 59 ½ or older.

Required Minimum Distribution

Must withdraw an IRS-determined minimum from your account after you reach age 70 ½.

How you calculate that amount depends on whether or not your spouse is the sole beneficiary and is 10 or more years younger than you. Calculate your Required Minimum Distribution at IRS.gov

There is no required minimum distribution (RMD) for Roth IRAs during the life of the original owner. Your beneficiaries, however, will be subject to the RMD of a Traditional IRA.

Want to learn more about IRAs?

We’re here for you. Speak with a banker at a BBVA branch near you or contact one of our customer service representatives by phone.