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401(k)s and IRAs are two common types of retirement plans. You can only contribute to a 401(k) if you work for a company that offers one, but you can typically fund an IRA as long as you earn money from working.
But the differences don’t stop there. Read on to learn about how 401(k)s and IRAs stack up, including contribution limits, withdrawal rules, and investment choices.
What is a 401(k)?
A 401(k) is a tax-advantaged retirement account that’s sponsored by an employer. You can only invest in a 401(k) if your workplace offers one.
When you contribute to a 401(k), the money is automatically deducted from your paycheck and invested. You’ll select the investments for the account, often from a menu of mutual funds, which pool investors’ money together to invest in many different securities, like stocks or bonds.
Learn more: What is a 401(k)? A guide to the rules and how it works.
In a traditional 401(k), you invest your money pre-tax, which lowers your taxable income for the year. Your money compounds and grows tax-free over time. Then, you pay taxes on your withdrawals.
However, a growing number of plans now offer Roth 401(k)s, which you fund with post-tax money. You don’t get an up-front tax break on your contributions, but the money grows on a tax-deferred basis. If you follow certain rules, your withdrawals are tax-free in retirement.
What is an IRA?
IRA stands for individual retirement arrangement, though it’s more commonly known as an individual retirement account. It’s an account you set up individually, without the involvement of an employer. You can contribute to an IRA as long as you have earned income, i.e., money you earn from wages, a salary, self-employment income, or commissions. Or if you’re married and file a joint tax return, you can contribute if your spouse has earned income, even if you don’t make money working.
As with 401(k)s, there are two different types of IRAs: traditional IRAs and Roth IRAs. A traditional IRA is funded with pre-tax money; withdrawals are taxed as regular income. You may be able to deduct your contributions for tax purposes, depending on your income and whether you have a workplace retirement account.
A Roth IRA is funded with post-tax money, so contributing won’t help you score a tax break for the current year. But your withdrawals are tax-free once you’re age 59½ and you’ve had the account for at least five years.
You can set up an IRA at most major brokerages. You’ll need to select your investments. You can typically invest IRA money in pretty much any stock, bond, mutual fund, or exchange-traded fund (ETF) you choose.
Learn more: Robo-advisor: How to start investing right away
Key differences between a 401(k) vs. IRA
401(k)s and IRAs are both tax-advantaged accounts that allow you to invest for retirement. Now, let’s break down the main difference between the two.
401(k) and IRA eligibility
To contribute to a 401(k), you need to work for a company that offers one. You’re eligible to put money into a 401(k) no matter how much you earn.
You can fund an IRA as long as you (or your spouse if you’re married filing a joint return) have earned income for the tax year. However, you may face some income-based restrictions:
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Traditional IRAs: You can contribute at any income level, but you may not be able to deduct your contribution if you or your spouse have an employer-sponsored retirement account and you earn above certain thresholds.
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Roth IRAs: You’re only eligible to directly fund a Roth IRA if you earn less than the annual income limit. However, there’s a strategy called a backdoor Roth IRA that some higher earners use to fund a Roth IRA when they earn above the limit. Basically, you fund a traditional IRA, then convert it to a Roth IRA and pay taxes on the converted amount.
401(k) and IRA matching contributions
Though some brokers may “match” a small percentage of your contributions, you’re pretty much on your own when it comes to funding your IRA. Most employers, however, match at least a portion of workers’ 401(k) contributions.
Learn more: How a 401(k) match works and why you should seek it out
401(k) and IRA contribution limits
401(k)s contribution limits are significantly higher than IRA contribution limits, as you can see from the chart below.
Note that the contribution limits are higher for both IRAs and 401(k)s for people 50 and older because they’re eligible for catch-up contributions, which is extra money that people nearing retirement are allowed to save in tax-advantaged accounts. The higher 401(k) contribution limits you’ll see for workers ages 60-63 in 2025 are a change ushered in by the Secure Act 2.0, a piece of legislation aimed at improving retirement security that passed in 2022.
401(k) and IRA investment options
A 401(k) has a relatively limited selection of investment options compared to IRAs. You may be limited to a handful of mutual funds selected by your plan’s administrator.
You can usually invest your IRA in whatever stocks, bonds, or funds you choose. Some IRAs called “self-directed IRAs” let you invest in a broader range of assets, like cryptocurrency and precious metals. Only a few types of assets, like artwork and real estate that you personally use, are completely off-limits for IRAs.
Learn more: Bitcoin clears another record: Is now the time to invest?
401(k) and IRA withdrawal rules
401(k)s and IRAs are both meant for retirement savings rather than short-term savings. So, you’ll often face a 10% penalty on top of applicable taxes if you withdraw your money before retirement age.
But there are a few exceptions.
Under the rule of 55, you’re allowed to take penalty-free 401(k) distributions if you leave your job for any reason the year you turn 55 or any time after (or 50 or later for public safety workers). You can only take penalty-free withdrawals from the 401(k) plan of the company you worked for at the time you left your job.
You can also access Roth IRA contributions (but not the earnings) without a penalty or taxes. But you’ll owe taxes or a penalty if you deplete your contributions and withdraw from the earnings portion of the account.
The IRS allows you to take withdrawals from both 401(k)s and IRAs where you avoid the 10% penalty if you experience an “immediate and heavy” financial need, such as if you become disabled or have large medical bills. Not all 401(k) plans allow hardship distributions, though.
Once you reach age 73, you’ll need to make mandatory taxable withdrawals called required minimum distributions (RMDs) from any pre-tax 401(k) or IRA. RMDs don’t apply to Roth 401(k)s or IRAs.
401(k) and IRA loans
Many plans allow you to take 401(k) loans. You won’t owe taxes or a penalty on the amount you borrow, but you’ll need to repay the loan, plus interest, within five years to avoid having it treated as an early distribution, which could result in taxes and a 10% penalty.
The IRS doesn’t allow IRA loans. If you borrow money from an IRA, the entire account is no longer considered an IRA. The entire balance will then be considered income by the IRS.
401(k) pros and cons
401(k) pros:
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Many employers match some or all of your contributions up to a certain limit.
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You can contribute no matter how much you earn.
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The contribution limits are higher than IRA limits.
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You can take out a 401(k) loan if your employer allows it.
401(k) cons:
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You need to work for a company that sponsors a 401(k) to contribute.
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Your investment options may be fairly limited.
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You may need to do a 401(k) rollover to another employer’s retirement plan or an IRA if you leave your job.
IRA pros and cons
IRA pros:
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You can set up the account without involving your employer and won’t need to roll over the balance if you change jobs.
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IRAs have a wider range of investment choices.
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Roth IRAs allow you the flexibility to withdraw your contributions at any time without owing penalties or a 10% tax.
IRA cons:
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Contribution limits are much lower than 401(k) limits.
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Roth IRAs are subject to income limits, and you may not be able to deduct traditional IRA contributions if you earn above a certain threshold and don’t have a workplace plan.
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There’s no employer match.
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You can’t take out an IRA loan.
401(k) vs. IRA: Which should I choose?
You’re allowed to contribute to both accounts up to the annual limits. However, if your employer offers a 401(k), you don’t have to choose between a 401(k) and an IRA.
Since a lot of people don’t have unlimited budgets for retirement savings, a good recommendation is to save enough in your 401(k) to get your full employer match. Once you’re getting all that free money, invest in a Roth IRA if you’re eligible since you get the flexibility to withdraw your contributions if necessary.
401(k) vs. IRA FAQs
Is a 401(k) an IRA?
No. A 401(k) and IRA are two different types of retirement accounts. While 401(k)s are employer-sponsored retirement accounts, IRAs are accounts you open individually.
Is there a Roth 401(k)?
Yes, most 401(k)s have a Roth 401(k) option that you fund with post-tax money that offers the potential for tax-free income in retirement. In the past, employer contributions were always made in a separate pre-tax account, but under the Secure Act 2.0, employers now have the option of making Roth (after-tax) contributions.
Should I max out my 401(k) or IRA first?
Contribute enough to your 401(k) to get your employer’s full match first. Once you’re doing that, you can contribute to an IRA if you have extra money to invest since there’s typically more flexibility than with an employer plan.
