What’s the Difference Between a 401(k) and an IRA?
- Jennifer Wills
- Apr 28
- 5 min read
A 401(k) is an employer-sponsored retirement savings plan that allows contributions through automatic paycheck deductions. The company might match the contributions up to a certain amount or percentage.
In contrast, an Individual Retirement Account (IRA) is a retirement savings option available to anyone with earned income or whose spouse has earned income. This account is funded with contributions from a bank account.
Similarities Between a 401(k) Plan and an IRA
Investing Tax Advantages
Contributions to a 401(k) generally are pre-tax.
Contributions to a traditional IRA can be tax-deductible if your income falls within the IRS’s income limits.
Contributing to a 401(k) plan or a traditional IRA might reduce your taxable income.
Your investments in a 401(k) account or an IRA can grow tax-deferred. If you earn dividends, realized capital gains, or other income, you won’t pay taxes on this income as long as the funds remain invested in the account.
Traditional and Roth Account Availability
A traditional retirement account typically means you can do the following:
Deduct your annual contributions from your taxable income.
Invest your contributions and let them grow tax-deferred.
Pay income taxes on withdrawals in retirement.
Conversely, a Roth retirement account does not let you deduct your contributions from your taxable income in the year they are made:
You make after-tax contributions to a Roth 401(k) or IRA.
Your contributions and their potential earnings grow tax-free.
As long as the money has been in the account for at least 5 years, withdrawals after age 59 ½ are free from federal taxes and penalties.
Your income must fall within the IRS’s income limits to contribute to an IRA. If you’re a high earner, you might be unable to contribute to a Roth IRA or deduct your contributions to a traditional IRA.
Withdrawals Before Retirement
Withdrawals from retirement accounts before age 59 ½ can result in taxes and penalties. One exception is that contributions to a Roth IRA are always tax- and penalty-free.
Although the allowed exceptions for the early withdrawal penalty can differ between a 401(k) and an IRA, the following penalty exceptions apply to both if the Roth 401(k) or Roth IRA has been held for 5 years:
Birth and adoption expenses up to $5,000
Unreimbursed medical expenses in excess of 7.5% of your adjusted gross income (AGI)
Domestic abuse distributions
Total and permanent disability
Withdrawals in Retirement
Generally, 401(k) and IRA withdrawals are penalty-free if you are 59 ½ or older. However, you might owe taxes on earnings withdrawn from a Roth IRA or Roth 401(k) if the account has not been held for 5 years.
Required Minimum Distributions (RMDs)
A traditional 401(k) or IRA requires withdrawals starting at age 73, or age 75 starting in 2033. Employees who are still working for the company might be able to delay these withdrawals from the 401(k) plan until they stop working. However, an employee who owns 5% or more of the company is required to take required minimum distributions (RMDs) as scheduled at the designated age.
Differences Between a 401(k) Account and an IRA
A 401(k) account and an IRA have the following differences:
Account Availability
You can invest in a 401(k) plan if your employer offers one and you meet the qualifications to participate. You can also access a Roth 401(k) if your employer provides this type of account.
In contrast, a traditional or Roth IRA is available at banks and online brokers:
Know your modified adjusted gross income (MAGI) before contributing to an IRA, as Roth contribution eligibility and traditional IRA deductibility have different income ranges.
Your income must fall within IRS limits for you to deduct contributions to a traditional IRA or to contribute to a Roth IRA.
Investment Options
Because your employer chooses your 401(k) investment options, they might be limited. In contrast, you can open an IRA through a provider that offers the investment options you seek.
Contribution Limits
A 401(k) account has a significantly higher contribution limit than an IRA.
The contribution limit for a 401(k) in 2026 is $24,500:
If you are age 50 to 59 or 64 or older, you can contribute an additional $8,000 in catch-up contributions in 2026.
If you are age 60 to 63, you can contribute up to $11,250 in catch-up contributions in 2026 if the plan allows.
If you are age 50 to 59 or 64 or older, you can contribute up to $32,500 in 2026.
If you are age 60 to 63, you can contribute up to $35,750 in 2026 if the plan allows.
In contrast, the IRA contribution limit if you are under age 50 in 2026 is $7,500:
If you are age 50 or older, you can contribute up to $8,600.
You cannot exceed the contribution limits across your traditional and Roth 401(k)s or IRAs.
Income Limits
A 401(k) has no income limits. If your employer offers a plan and you are eligible to participate, you can contribute.
Conversely, your annual earnings impact how much you can contribute to a Roth IRA or how much of your traditional IRA contributions you can deduct from your taxable income. If your income exceeds the limits, you can contribute to a backdoor Roth IRA to access a Roth IRA.
Employer Contributions
Your company might contribute to your 401(k) through profit-sharing, adding a set amount or percentage to your account regardless of your contributions. Or, you might receive a 401(k) match, where the company contributes a certain amount based on your contributions. For instance, the match might be one dollar for every dollar you contribute, up to 3% of your salary.
Employer 401(k) contributions might be subject to a vesting period:
You gain additional ownership of a larger percentage of your employer’s contributions every year you work for the company.
For instance, you might get 20% more of your employer's contributions every year you work for the company until you own 100% after 5 years.
Your contributions always are 100% vested.
Conversely, employers do not make or match contributions to an IRA.
Account-Specific Early Access to Funds
There are account-specific ways to access your money penalty-free before age 59 ½.
Some 401(k) plans allow loans:
You can borrow up to 50% of your account value, up to $50,000, every 12 months.
You must pay back the loan with interest, subject to the loan agreement's terms and conditions, typically within 5 years.
If you don’t pay back the loan according to the terms, the IRS will treat the loan as an early distribution.
If you leave your company before your loan is paid back, you might have to repay it quickly or risk it being considered an early withdrawal, requiring you to pay taxes and penalties.
You can withdraw Roth IRA contributions tax- and penalty-free at any time:
Withdrawals from a traditional IRA or a Roth IRA held for 5 years can be used to pay for health insurance if you are unemployed.
An IRA or a Roth 401(k) held for at least 5 years allows tax- and penalty-free withdrawals for the following IRS exceptions:
o Qualified higher education expenses
o Up to $10,000 to purchase your first home
You Can Contribute to an IRA and a 401(k)
If you work for a company that offers a 401(k) plan, you can contribute to both a 401(k) and an IRA:
If you have a 401(k) with an employer match, you should contribute at least enough to take advantage of the full match to gain free money.
You should weigh the pros and cons of having a 401(k) and an IRA alongside your financial goals to determine how much to contribute to each.
*This information is for educational purposes only.
Do you have a 401(k) and/or an IRA, or do you plan to open one? Let me know in the comments!
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