When you’re getting ready to retire, you’ll want to know the differences between a 401(k) and an Individual Retirement Account (IRA). Both have tax benefits so you can save for retirement, but they differ in several important ways, such as structure, how much you contribute, your investments, and even what kind of benefits, like employer matching, might be available to you.
Setup and accessibility
The main distinction between a 401(k) and an IRA is their accessibility and nature. A 401(k) is an employer-sponsored retirement savings plan, meaning it is offered through your employer. An IRA is generally set up on your own with an institution, independent of your employment. This, therefore, implies that although an IRA can be established and contributed to by nearly anybody with a working income, obtaining a 401(k) involves having a firm with such a scheme.
Contribution limits
Contribution levels for the accounts differ. A 401(k) contribution in 2025 is $23,500 annually for individuals under age 50, and an extra catch-up contribution of $7,500 is permitted for individuals age 50 or older, making their maximum $31,000. IRAs are capped at $7,000 for individuals under age 50, with a $1,000 catch-up contribution for individuals age 50 and older, for a maximum of $8,000.
Tax treatment: Traditional and Roth
Both 401(k)s and IRAs exist in two primary forms: Traditional and Roth, with each having a distinct tax treatment.
- Traditional 401(k) and IRA: Contributions are made using pre-tax dollars, lowering your taxable income for the year. Taxes are paid at retirement withdrawal.
- Roth 401(k) and IRA: Contributions are made using after-tax dollars, with no tax deduction at the time. Qualified retirement withdrawals are tax-free.
The choice between Roth and Traditional accounts depends on your current tax status and projections regarding your future tax rate.
Employer matching contributions
One of the best features of most 401(k) plans is the possibility of employer-matching contributions. Your employer will contribute some of your own money, effectively adding free money to your retirement fund. A good example is an employer matching 100% of your contribution up to 3% of your salary. This benefit is reserved for employer-sponsored plans such as 401(k)s; IRAs are set up individually and thus lack employer matching.
Investment choices
IRAs generally have a greater range of investments to select from, including stocks, bonds, mutual funds, and ETFs, which offer more opportunities to diversify your portfolio. 401(k) plans are limited to the options in the employer plan, which can be limiting, but will make your decisions that much simpler.
Loan provisions
Most 401(k) plans also offer the ability to borrow against the account balance, and money is withdrawn tax-free at earlier withdrawals. However, they must be repaid with interest and default fees, taxes, and penalties. IRAs don’t allow loans; withdrawing cash before age 59½ usually attracts taxes plus another 10% early withdrawal penalty.
Required Minimum Distributions (RMDs)
Both traditional IRAs and IRAs through a 401(k) plan require the account owners to begin taking RMDs at age 73. Roth IRAs do not have RMDs throughout their owner’s life, and the account can accumulate tax-free for an extremely long period. Roth 401(k)s both need to take RMDs, but can rescind this rule by making a conversion to a Roth IRA.
Income limits and qualifications
Though 401(k) plans themselves do not place contribution amounts or qualification income limits, IRAs, as well as Roth IRAs, are subject to income limits that either exclude or limit contributions. An example would be that, as of 2024, unmarried individuals who have a modified adjusted gross income (MAGI) exceeding $161,000 and joint filers with more than $240,000 MAGI cannot contribute to a Roth IRA. Traditional IRAs also tax you with income limits on contribution deductibility, especially when you or your spouse are covered under an employer
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Choosing between a 401(k) and an IRA
Whether or not to have a 401(k) or an IRA rests on numerous considerations, including if you are eligible for an employer plan, contributions, investments, and tax benefits.
Ninety-nine percent of planners recommend donating to the employer match in your 401(k) because it’s free money. Second, if you want more investment alternatives or your 401(k) plan is expensive, contributing to an IRA would be a good recommendation. Presumably, you should be able to utilize both accounts to build an even plan with the best of both worlds to maximize your retirement savings.
