IRA vs. 401(k): A Comparison of Retirement Savings Vehicles

If you’re thinking about saving for retirement, chances are you’ve heard of IRAs and 401(k). These two account types are among the most common options for building savings for the long term while also receiving tax benefits.

Both are designed to support retirement goals. However, each type works differently. Below, we’ll go over how IRAs and 401(k)s compare when it comes to contribution limits, employer involvement.

What Are IRAs and 401(k)?

IRAs and 401(k)s are both designed to help you save for retirement. Here’s a breakdown of what makes each one unique and how they measure up.

Overview of IRAs and 401(k) Plans

A 401(k) is a retirement savings plan offered by your employer. It usually includes the option to match contributions. This means your employer contributes money alongside yours. One of the main advantages of a 401(k) is the higher annual contribution limit.

An IRA (Individual Retirement Account) is something you open on your own if you have earned income. It’s not connected to your job and grants you more options for investing your money. However, the amount you can contribute yearly is lower than what’s allowed in a 401(k).

Both IRAs and 401(k)s come in Traditional and Roth versions. The difference between these comes down to when you pay taxes. 

Here’s a comparison of the two:¹

Contribution Limits and Catch-Up Provisions

One important difference between IRAs and 401(k)s is how much money you’re allowed to put into them each year. These limits change occasionally, so it’s wise to stay up to date. There are also extra contributions allowed once you turn 50. These help you save more as you get closer to retirement. 

2025 Contribution Limit

For 2025, you can contribute up to $23,500 to a 401(k) if you’re under 50 years old. That limit applies across all 401(k) accounts you might have during the year.²

For IRAs, the contribution limit is $7,000 for those under 50. This applies to the total of all IRAs you own (Traditional and Roth combined).³

The higher 401(k) limit makes it a great option if you want to save as much as you can in tax-advantaged accounts.

Catch-Up Contributions After Age 50

Once you turn 50, you can make additional contributions to both account types. The catch-up amount for 401(k)s is $7,500, making the total annual limit $31,000.⁴

You can add $1,000 more for IRAs, allowing up to $8,000 each year.⁵

These catch-up contributions will give older savers more room to grow their retirement funds before they stop working.

Employer Involvement and Matching Contributions

One of the big differences between IRAs and 401(k)s is employer involvement. A 401(k) is connected to your job. This means your company can add money to your account. IRAs, however, are managed by you alone.

Why IRAs Are Self-Directed Only

IRAs are open and managed by individuals, not employers. You choose where to open the account, such as a bank, brokerage, or investment platform, and decide how much to contribute and what to invest in.

There are no matching contributions or employer rules to follow. This gives you more control over your investment choices, but it also means you’re the only one funding the account. 

Employer Contribution and Vesting in 401(k)

With a 401(k), your employer may offer to match a portion of your contributions. For example, they might add 50 cents for every dollar you contribute, up to a certain limit. This is one of the main benefits of using a 401(k).

Some employers also use a vesting schedule. That means you might need to stay with the company for a certain number of years before the matched money fully belongs to you. The longer you stay, the more of those contributions you get to keep.

IRAs don’t have this kind of setup. Everything in the account is yours from the beginning. 

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Investment Options and Account Flexibility

Another difference between the two is how much control you have over your investments. Both accounts are used for long-term growth. However, the choices available and who manages them vary quite a bit.

Common 401(k) Investment Options

Most 401(k) plans offer a set list of investment options. These are picked by your employer or the company that runs the plan. Common options include:

• Mutual funds: These funds pool money from many investors to buy a mix of stocks, bonds, or other assets. It’s managed by a professional and offers built-in diversification.
• Target-date funds: This type of fund automatically shifts its investments from growth to safety as you get closer to your chosen retirement year. It’s a set-it-and-forget-it option.
• ETFs (Exchange-Traded Funds): These funds trade like stocks. They offer a mix of assets, low fees, and flexibility to buy or sell during the day.

These selections are designed to be easy to manage and generally fit a wide range of goals. However, the limited choices may feel restricting if you want more say in where your money goes. Any changes you want to make typically need to follow the rules of your specific plan. 

Investment Choices in an IRA

IRAs give you a lot more freedom when it comes to choosing investments. You’re not limited to a present list. You can choose from stocks, bonds, mutual funds, ETFs, and even things like REITs (Real Estate Investment Trust) or cryptocurrency in some cases. 

The variety of options is a plus if you like to research and make your own investment decisions. Just remember, it’s on you to keep things balanced and aligned with your long-term goals.

Tax Treatment and Withdrawal Rule

IRAs and 401(k)s offer tax benefits, but how and when you get those benefits depends on your type of account. It’s also important to know the rules around withdrawals, especially the ones that can lead to penalties.

Required Minimum Distributions (RMDs)

Most retirement accounts don’t let you leave the money untouched forever. Traditional IRAs and 401(k)s require you to start taking withdrawals, called Required Minimum Distributions (RMDs), starting at age 73. If you were born in 1960 or later, that age rises to 75.⁶

Roth IRAs don’t have RMDs during your lifetime, which gives you more control over when to use the money. However, Roth 401(k)s do come with RMDs, unless you roll them over into a Roth IRA. 

Missing an RMD deadline can lead to a steep tax penalty, so be sure to plan ahead.

Early Withdrawal Penalties and Exceptions

Taking money out of a Traditional IRA or 401(k) before age 59½ usually means paying a 10% penalty, plus regular taxes.⁷

Roth contributions (not earnings) can be withdrawn at any time without penalty. However, earnings from those contributions follow different rules and might be taxed if withdrawn early.

Both IRAs and 401(k)s allow certain exceptions to the penalty, like if you’re disabled, face large medical expenses, or are buying your first home (for IRAs). Knowing these exceptions helps you avoid unnecessary penalties if you ever need to draw from your retirement savings early. 

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Portability and Account Maintenance

Not all retirement accounts move with you the same way when you change jobs. 401(k)s are tied to your employer, which makes them a bit harder to manage if you change jobs regularly. IRAs, on the other hand, are always yours. It doesn’t matter where you work.

When leaving a job, rolling over your 401(k) into an IRA is common. It keeps your retirement savings organized and avoids extra fees. IRAs also allow spousal contributions. This is useful if one partner doesn’t have earned income. And if you’ve got several old 401(k)s sitting around, moving them into a single IRA simplifies things to track and manage.

Strategic Use of Both Accounts

You don’t always have to choose between an IRA and a 401(k). Depending on your financial goalsIn most cases, using may helpboth helps you save more and gives you more flexibility down the road. Here’s how to think about combining the two.

Maximize 401(k) Contributions First

If your employer offers a 401(k) with matching contributions, that’s a good place to start. Contributing enough to get the full match means extra money going into your retirement account. This is money you wouldn’t get otherwise.

401(k) plans also let you contribute more each year than IRAs, which makes them best for those trying to build their savings faster.

Supplement with an IRA for Flexibility

Once you’ve maxed out your 401(k), consider adding money to an IRA. This gives you access to a wider range of investments than most 401(k) plans offer.

Depending on your income and goals, you may choose a traditional or Roth IRA. Either way, it’s a helpful way to keep building your retirement savings and diversify your investments.

Roth Conversions for Future Tax Planning

Another option to consider is converting some of your Traditional retirement savings into a Roth IRA. This is called a Roth conversion.

You’ll pay taxes on the amount you convert, but once it’s in the Roth IRA, future withdrawals are tax-free if the account meets certain conditions. This can be beneficial in lower-income years when your tax rate is smaller than usual. It’s one way to give yourself more tax flexibility in the future. 

Choosing the Right Fit for Your Retirement Goals

Deciding between an IRA and a 401(k) doesn’t necessarily mean choosing one over the other. The better choice depends on:

• Your job situation
• Your income
• How involved you want to be with investments
• What kind of flexibility you want

If your employer offers a 401(k) with a match, that’s often a smart place to begin. An IRA may be a better choice if you want more control over your investments or need an account that is not tied to your job. And in most cases, utilizing both gives you more ways to save and more flexibility in the future.

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