What’s the Difference Between an IRA and a 401(k)?
What’s the Difference Between an IRA and a 401(k)?
Description: Confused between a 401(k) and an IRA? You’re not alone. In this guide, we break down the differences in contribution limits, tax benefits, employer matching, and investment flexibility—so you can make smarter retirement decisions today.
1. IRA vs. 401(k): Basic Definitions
A 401(k) is an employer-sponsored retirement plan. It allows employees to contribute a portion of their salary pre-tax (or post-tax in a Roth 401(k)). Employers may also offer matching contributions.
An IRA (Individual Retirement Account) is opened by an individual, not tied to an employer. It also comes in two types: Traditional IRA and Roth IRA. Both offer tax advantages but differ in how and when you get the tax break.
Think of a 401(k) as a workplace benefit and an IRA as your personal financial move.
2. Contribution Limits: How Much Can You Save?
As of 2025, here are the contribution limits:
- 401(k): $23,000 per year (+$7,500 catch-up if age 50+)
- IRA: $7,000 per year (+$1,000 catch-up if age 50+)
The 401(k) lets you save more—especially useful for high earners or late starters.
3. Tax Benefits and Withdrawal Rules
Both accounts offer tax advantages, but in different ways:
- Traditional IRA & 401(k): Contributions are pre-tax (or tax-deductible), reducing taxable income. Withdrawals in retirement are taxed as income.
- Roth IRA & Roth 401(k): Contributions are made with after-tax dollars. Qualified withdrawals are tax-free.
Required Minimum Distributions (RMDs) start at age 73 for Traditional accounts. Roth IRAs have no RMDs during your lifetime—but Roth 401(k)s do (unless rolled into a Roth IRA).
4. Investment Options and Control
With a 401(k), your investment options are limited to what your employer offers—typically mutual funds, target-date funds, and company stock.
IRAs offer broader freedom: you can invest in ETFs, individual stocks, bonds, REITs, and more—ideal if you want to build a custom portfolio.
In short, IRAs offer flexibility. 401(k)s offer convenience.
5. Employer Match and Workplace Access
The biggest advantage of a 401(k)? Employer match. Many companies match 50% to 100% of your contributions up to a certain percent of your salary. That’s free money.
IRAs don’t offer matches—they’re entirely self-funded. But anyone with earned income can open one, regardless of employer.
Tip: Always contribute enough to your 401(k) to get the full match. Then, if eligible, consider contributing to a Roth IRA for added flexibility.
6. Which Account Is Better for You?
There’s no one-size-fits-all. Here's a quick decision guide:
- Start with 401(k) if your employer offers a match—always take free money.
- Add a Roth IRA if you want tax-free withdrawals and wider investment choices.
- Max out 401(k) if you want to save aggressively for retirement (especially if you're 50+).
Many savvy savers use both. The combination creates a tax-diversified retirement plan with flexibility and growth potential.
Did you know?
According to Vanguard’s 2024 Retirement Report, only 14% of Americans max out both their IRA and 401(k) accounts. Yet those who do often retire with 3–4x more savings. Diversifying your retirement contributions across both plans lets you manage future tax burdens and access funds more strategically. Even small contributions today compound into major benefits tomorrow.
1. Can I contribute to both an IRA and a 401(k)?
Yes! You can contribute to both, provided you meet income limits for Roth or deductible Traditional IRA contributions. This is a powerful way to diversify your retirement tax strategy.
2. What if I leave my job—what happens to my 401(k)?
You keep your 401(k), but it stays with your former employer’s plan unless you roll it over into an IRA or your new employer’s 401(k). Rolling it over gives you more control and possibly better investment options.
3. Are there income limits for contributing to an IRA?
For Roth IRAs, yes. For 2025, the phase-out begins at $146,000 (single) or $230,000 (married). Traditional IRAs don’t have income limits for contribution—but deductibility may be limited if you or your spouse has a retirement plan at work.
4. Can I open an IRA if I'm self-employed?
Absolutely. You can open a Traditional or Roth IRA—and even a SEP IRA or Solo 401(k) for higher contribution limits. These accounts are especially powerful for freelancers and small business owners.
5. Should I choose Roth or Traditional?
If you expect your tax rate to be higher in retirement, Roth may be better. If you want the tax deduction now, Traditional could work. Many people split contributions across both for flexibility.
