Differences Between Mutual Fund & 401k

Knowing the difference between mutual funds and 401k plans aids in investment planning.
Knowing the difference between mutual funds and 401k plans aids in investment planning. (Image: investment image by Kit Wai Chan from Fotolia.com)

A number of factors comprise the differences between a mutual fund and 401k. Primarily, a mutual fund is an actual investment vehicle, while a 401k is a tax-deferred account that holds investments (including mutual funds). Investors should understand the other important differences between a mutual fund and 401k to take advantage of both.


A mutual fund is a lot like going in on a group gift, according to Morningstar, a stock and mutual fund research group. A mutual fund allows many investors to group their money together and invest in a greater number of stocks and bonds than they could individually. Buying a mutual fund actually purchases “ownership” in a corporation that hires a manager to make the investments, according to Morningstar.

A 401k is typically set up through an employer and made available to the company’s employees generally as a means for saving for retirement . Several 401k varieties exist. Traditional 401k plans allow employees to make pretax contributions to the 401k plan, which drives down their taxable income and reduces their taxes, according to the Internal Revenue Service's 401k Resource Guide.

Employers generally match contributions on some level. Mutual funds have no matching programs.

Tax Implications

Earnings from mutual funds outside of a 401k can be taxed annually. Within most 401k plans, investment earnings (including mutual fund earnings) are tax-deferred until withdrawn at retirement. Earnings from any 401k plans built around a Roth IRA will not be taxable, since contributions to these Roth 401k plans are made after taxes.


Only employees are eligible to contribute to their employer’s 401k plan. However, any investor can buy into a mutual fund. Employees electing to participate in a 401k usually have a few options to select. Mutual fund investors can buy into any fund they feel fits their investment strategy.

Limits on Contributions

Another major difference between a mutual fund and 401k is how much investors can contribute. Investors can spend as much as they wish on mutual funds, while 401k plans have federally mandated limits on how much an individual can contribute in a year. For traditional 401k plans, the limit is $16,500 for 2010 for investors younger than 50. Those over 50 are allowed an additional $5,500 in “catch-up contributions” for a total limit of $22,000, according to the IRS.

Access to Contributions

A 401k account has strict limits on when contributions can be withdrawn. Generally, any contributions withdrawn from a 401k before the investor turns 59 1/2 years old will incur a 10 percent penalty. Exceptions include certain situations such as disability or financial hardship. Mutual fund contributions can be accessed by investors whenever they wish with no penalty.

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