IRA vs. 401(k): Comparing Two Popular Retirement Plans

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Saving for retirement is one of the smartest things you can do for your future, but choosing between different retirement accounts can sometimes feel overwhelming. Two of the most common options are IRAs and 401(k) plans. If you’ve ever wondered what the key differences are between an IRA account or a 401(k), you’re in the right place!

In this article, we’ll break down each option, compare their benefits and help you decide which might work best for your situation.

What Is an IRA?

An IRA, or Individual Retirement Account, is a tax-advantaged savings account anyone with earned income can open. While your employer doesn’t sponsor it, you can set one up with a bank, brokerage or other financial institution.

IRAs come in two main varieties: Traditional and Roth. Let’s dig into both.

Traditional IRA

• How It Works: You typically make contributions with pre-tax dollars, meaning you can deduct them from your taxable income (if you’re within certain income limits).
• Withdrawals: You pay taxes on distributions in retirement as ordinary income.
• Contribution Limits: As of 2025, you can contribute up to $7,000 annually or $8,000 if you’re 50 years or older. These limits usually adjust over time for inflation.
• Eligibility: Anyone under 70½ (before 2020) could contribute to a traditional IRA, but new rules generally remove age caps as long as you have earned income. However, your ability to deduct contributions might phase out at higher incomes, especially if you also have a 401(k).

Roth IRA

• How It Works: You contribute with after-tax money. There’s no upfront tax deduction.
• Withdrawals: Qualified distributions in retirement are tax-free — no taxes on the gains or the principal as long as you meet requirements.
• Contribution Limits: You must have earned income to open a Roth. However, there are income limits for eligibility — between $150,000 and $165,000 for single taxpayers and heads of households and between $236,000 and $246,000 for married couples. Contribution limits are $7,000 per year or $8,000 if you’re 50 or older.
• Eligibility: Anyone with earned income can contribute, provided their modified adjusted gross income (MAGI) stays below certain IRS limits.

IRAs give you a wide range of investment options, from stocks and bonds to mutual funds and exchange-traded funds (ETFs). This flexibility is a key IRA benefit over 401k plans, which often have a more limited menu.

What Is a 401(k)?

A 401(k) is an employer-sponsored retirement plan, making it a group benefit rather than an individual arrangement. If your workplace offers a 401(k), you can contribute part of your paycheck to it — usually pre-tax, though Roth 401(k) options are increasingly common.

Although there are IRA benefits over a 401(k), employers often match a percentage of the employee’s contributions to this retirement plan, which is essentially free money.

As of 2025, you can contribute up to $23,500 to your 401(k). Employees ages 50 to 59, as well as those 64 and up, can make an additional $7,500 in catch-up contributions. Starting this year, people 60 to 63 can contribute up to $11,250 in catch-up contributions. 

401(k)s offer tax advantages, but they may look a little different depending on the type you choose:

• Traditional 401(k): Contributions aren’t taxed until you withdraw them in retirement. They can also lower your taxable income for the year you contribute.

• Roth 401(k): Contributions are taxed immediately, but you can withdraw tax-free in retirement. You can’t deduct these contributions on your taxes.

IRA vs. 401(k): A Side-by-Side Comparison

Here is an overview to help you quickly compare the differences between an IRA vs. 401(k) as well as a Roth IRA.

IRA vs. 401(k): Key Differences

Now, let’s break down the primary distinctions between an IRA versus 401(k):

• Eligibility: Anyone with a qualifying earned income can open a traditional IRA, but 401(k)s are only available through an employer. There might also be minimum age and service requirements for a 401(k) and maximum income limits for Roth IRAs.

• Contribution Limits: The largest gap between IRA vs. 401k accounts lies in how much you can contribute. Typical 401(k) plans have much higher contribution limits than IRAs. That means you’ll be able to save more each year toward your retirement.

• Tax Benefits: Both accounts have tax-deferred growth. However, 401(k)s are always pre-tax, while IRA contributions may be tax deductible depending on your income and whether you’re covered by an employer-sponsored retirement plan. 

• Investment Options: One of the key IRA benefits over a 401(k) is that there are more investment options with an IRA since you’re going through a broker. With a 401(k), your employer typically decides your investment options.

• Employer Matching: IRAs typically don’t have employer-matching contributions like 401(k)s, so you may not see as much growth with an IRA vs. 401(k).

Can You Have Both an IRA and a 401(k)?

Yes, you can. Many people use both to diversify their tax strategies and maximize their overall retirement savings. Here’s how it works:

• Tax Diversification: You could contribute pre-tax money to a Traditional 401(k) and after-tax money to a Roth IRA, balancing your tax obligations across different stages of life.
• Contribution Limits: Even if you max out a 401(k), you can still put up to $6,500 (or $7,500 if 50+) into an IRA — unless your income is too high for a deductible Traditional IRA or a direct Roth IRA.
• Rollover Options: If you leave your job, you could roll over your 401(k) into an IRA, consolidating your funds and potentially accessing broader investment choices.

Be aware of IRS rules regarding income limits for deducting Traditional IRA contributions, especially if you participate in a 401(k) at work.

Which Account Is Right for You?

If you have to choose between an IRA versus 401(k), an employer-sponsored plan is typically a better choice because it has higher contribution limits and often includes employer matches. 

Because of the higher limits and income limitations for Roth IRA eligibility, 401(k)s are particularly suited to high earners. And since peak earnings typically come in your 50s, 401(k)s are an especially good choice for older savers who can capture the massive $7,500 catch-up contributions after age 50 ($11,250 for those 60 to 63).

However, if you’re self-employed or your employer doesn’t offer a 401(k) plan, a traditional and Roth IRA can be a great alternative. 

When choosing a retirement plan, consider which plan aligns best with your tax strategy and retirement goals. If you think you’ll have a lower tax bracket in retirement, a traditional 401(k) or IRA could reduce your taxable income now since contributions are often tax deductible.

If you think you’ll be in a higher tax bracket, though, contributing to a Roth IRA or 401(k) will let you take tax-free withdrawals, potentially saving you money in the long run.

Scenarios

• Scenario A: Recent College Grad With a New Job
  • If your employer offers a 401(k) match, contribute enough to grab it — let’s say 3 to 6% of your salary. Beyond that, you could open a Roth IRA for broader investment choices.
• Scenario B: Mid-Career Professional
  • You might want to max out your 401(k) first because of the high limit. If you still have extra funds, open an IRA (Roth or Traditional) to further diversify taxes.
• Scenario C: Self-Employed or No Employer Plan
  • An IRA (or SEP-IRA, Solo 401(k) for self-employed) could be your primary channel for tax-advantaged contributions.

Final Take to GO

Deciding between an IRA vs. 401k doesn’t have to be intimidating. Each plays a valuable role in a well-rounded retirement strategy. You might start by contributing enough to get your employer’s match in a 401(k), then open an IRA if you want more investment freedom or a different tax setup.

Want more insights? Explore our other resources, like How 401(k) Contribution Limits Work. If you’re still unsure, speaking with a financial advisor can help tailor a plan that matches your unique goals. The sooner you start saving, the more time your money has to grow — so don’t wait to secure your financial future.

Jacob Wade contributed to the reporting for this article.

Information is accurate as of Feb. 28, 2025.

This article has been updated with additional reporting since its original publication.

Editorial Note: This content is not provided by any entity covered in this article. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by any entity named in this article.

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