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What are the differences between a 401(k) and a traditional IRA?
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The main difference between a 401(k) and a traditional IRA is the way contributions and withdrawals are taxed. With a 401(k), contributions are made pre-tax, meaning they are taken out of your paycheck before taxes are calculated. This reduces your taxable income and therefore your tax bill. Withdrawals from a 401(k) are taxed when the money is taken out. With a traditional IRA, contributions are made with after-tax money and withdrawals are taxed when the money is taken out. Both 401(k)s and traditional IRAs are investment accounts with the ultimate goal of providing retirement security, however, there are differences in the way contributions and withdrawals are taxed.