401K

401ks are employer sponsored retirement plans. They have higher contribution limits and employers have the option to match your contributions. The max annual contribution is $20500, and $27000 for people age 50 and over. The contributions are pre tax dollars, so it reduces taxable income. The downsides are that you have no control over plan and investment costs, and the investment options are limited. Distributions are taxed as income unless it’s Roth 401k. You have to start taking distributions by age 72.

IRA

IRAs are individual retirement plans offered by brokers and banks rather than an employer. The annual contribution limit for IRAs is $6000, and if you’re age 50 and older, it’s $7000. Contributions are pretax dollars, so it reduces taxable income. However, at higher income levels, and you have a 401k, the tax deduction you get from the contributions being pre tax dollars gets reduced or phased out. The distributions are taxed as regular income. You are required to take minimum distributions at age 72, just like a 401k.

ROTH IRA

Roth IRAs are individual retirement accounts. The max annual contribution is the same as the traditional IRA, and it also has a large investment selection. The major difference is that the contributions are after tax dollars but the withdrawals are tax free. Eligibility isn’t affected by a 401k, but there are income limitsThe contributions can be withdrawn any time and there is no minimum distribution in retirement. You could just let a Roth IRA grow forever.

ROLLOVER IRA

A rollover IRA is used to move money from an old 401k with a former employer into an IRA. The money remains tax deferred and there won’t be any trigger taxes or penalties. Cashing out an old 401k is a bad option because close to 40% of its value would be lost to taxes and penalties. If the former employer allows you to keep the money where it is, you still shouldn’t do it since you don’t have the old HR team to help you and there are probably higher fees since you’re an ex employee.