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 that lets you invest a portion of your paycheck, typically before taxes. Many employers also match part of your contributions, which is essentially free money for your retirement.

In 2025, you can contribute up to $23,500 to a 401(k). Workers ages 50 to 59 and 64+ can add a $7,500 catch-up, while those ages 60 to 63 can contribute an extra $11,250.

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).

Did You Know?

Millions of Americans have “lost” 401(k) accounts left behind at former employers. You can use the Department of Labor’s plan search tool to track down forgotten balances and roll them into a new IRA or 401(k).

Why a Small Fee Difference Can Cost You Big in Retirement

Both 401(k)s and IRAs come with fees that can quietly eat away at your returns over time. Common costs include administrative or recordkeeping fees (typically 0.1%-0.5% annually in 401(k) plans) and fund expense ratios, which cover investment management and can range from 0.05% for low-cost index funds to over 1% for actively managed ones.

Even a small difference in fees can make a big impact on your retirement savings. The chart below shows how a 0.5% versus 1% annual fee affects a $10,000 yearly investment over 30 years with a 7% average return, assuming consistent annual contributions and no withdrawals.

That half-percent difference may not sound like much, but over three decades it could mean more than $80,000 less in your retirement account. Reviewing your plan’s fee disclosure and choosing low-cost index funds or ETFs can help ensure more of your money stays invested and compounding for the future.

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.

How to Allocate Investments by Age and Risk

Whether you invest through a 401(k) or an IRA, what you invest in matters as much as how much you contribute. Your mix of stocks, bonds, and cash — known as asset allocation — should reflect your age, goals, and comfort with risk.

A common approach is to invest more heavily in stocks when you’re younger and gradually shift toward bonds and stable assets as you near retirement. For example:

Many retirement investors use target-date funds or managed portfolios that automatically adjust this mix over time, aligning your investments with your expected retirement date.

Tax Strategy Tips for 401(k) and IRA Investors

Your tax bracket can make a big difference in how you manage retirement savings. If you expect to move into a higher tax bracket later, consider a Roth conversion, which lets you move money from a traditional account into a Roth IRA and pay taxes now instead of later.

Conversions can make sense during low-income years, such as early retirement or career transitions, when your tax rate is temporarily lower. They can also help reduce future required minimum distributions (RMDs), giving you more control over your taxable income in retirement.

Pro Tip

If you expect to move into a higher tax bracket later, consider a Roth conversion during a low-income year. You’ll pay taxes now, but your withdrawals in retirement will be tax-free.

Self-Employed Retirement Plan Alternatives

If you’re self-employed, you can still save for retirement through specialized plans that offer higher limits and tax advantages:

• Solo 401(k). Best for business owners with no employees. Allows both employee and employer contributions for up to $69,000 in 2025 ($76,500 if age 50 or older).
• SEP IRA. A good choice for freelancers or sole proprietors. Easy to set up and lets you contribute up to 25% of net earnings, capped at $69,000.
• SIMPLE IRA. Designed for small businesses with up to 100 employees. Offers combined employer and employee contributions up to $16,000 ($19,500 if 50 or older).

Each plan offers a different balance of flexibility, contribution potential, and administrative effort–making it easier to find the right fit for your business structure and income level.

Which Account Is Right for You?

If you’re deciding between an IRA and a 401(k), the 401(k) is usually the stronger option thanks to its higher contribution limits and potential employer match.

A 401(k) also tends to benefit higher earners, who may exceed Roth IRA income limits, and older savers, who can make catch-up contributions of up to $7,500 after age 50 or $11,250 between ages 60 and 63.

If you’re self-employed or your workplace doesn’t offer a plan, a traditional or Roth IRA can still be a powerful way to grow retirement savings.

Choose the plan that fits your tax outlook. A traditional 401(k) or IRA can lower taxable income now if you expect a lower tax bracket in retirement, while a Roth account makes more sense if you expect higher taxes later and want tax-free withdrawals in retirement.

Real-Life Scenarios: Which Retirement Plan Fits You Best?

• Scenario A: Recent College Grad Starting a New Job. If your employer offers a 401(k) match, contribute enough to get the full match — that’s free money. Once you’ve secured it, consider opening a Roth IRA for more investment flexibility and tax-free growth.
• Scenario B: Mid-Career Professional. Focus on maxing out your 401(k) first to take advantage of its higher contribution limit. If you still have room in your budget, add a Roth or traditional IRA to diversify your tax exposure in retirement.
• Scenario C: Self-Employed or No Employer Plan. If you don’t have access to a workplace plan, use an IRA, SEP IRA, or Solo 401(k) as your main way to save. These options still offer tax-deferred or tax-free growth, depending on the type you choose.

How to Choose the Right Retirement Plan for You

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 Oct. 8, 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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