What’s the difference between a 401(k) and an IRA?

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Comparing types of nest eggs.

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When considering tax-advantaged retirement plans, two majors come to mind: the individual retirement account (IRA) and the 401(k) plan.

If your employer offers a 401(k), how do you decide if you should participate in it versus contributing to your own IRA? Although there are many similarities between the two, there are some differences, including contribution limits, investment choices, and what happens when you take money out.

The following table offers a quick side-by-side comparison of the two retirement plans.

A 401(k) is a type of retirement savings account that’s offered only through an employer. You contribute to your 401(k) via automatic deductions from your paycheck. A traditional 401(k) is a tax-deferred plan, which means your contributions go into your account before you pay taxes on them. You pay taxes later, when you withdraw the money during retirement.

Some employers offer a Roth 401(k) plan. With a Roth, you pay taxes now, but all withdrawals from the account during retirement are tax-free.

Eligibility. You can only contribute to a 401(k) plan if your employer offers one. Specific eligibility rules may apply. Check with your human resources department to determine if you’re able to contribute.

401(k) contribution limit. The Internal Revenue Service (IRS) sets limits on how much you can save in a 401(k) each year. For the 2024 tax year, the 401(k) contribution limit is $23,000. If you’re age 50 or older, you can make up to $7,500 in additional “catch-up” contributions. For 2025, the contribution limit bumps up to $23,500. If you’re age 50 to 59 or 64 and older, you can kick in up to an additional $7,500, while a new enhanced catch-up allows those ages 60 to 63 to add an additional $11,250.

Matching contributions. Your employer may match your 401(k) contributions, up to a percentage of your contributions or a portion of your salary. This is a great perk because it’s like getting free money to save for retirement. If you’re able, try to contribute enough to maximize the match. For example, if your employer matches 100% of the first 5% of your salary, by contributing 5%, you’re really saving 10% of your salary.

Vesting. Your employer’s contributions (any matched funds) to your 401(k) may be subject to a “vesting schedule.” That means you may have to work for your employer for a certain number of months or years before you fully own the contributions they’ve matched for you. Of course, contributions you make (the amounts deducted from your paychecks) are yours from day one.

Taxes. A traditional 401(k) is a tax-deferred plan. That means your contributions and any investment income aren’t taxed; however, you’ll pay taxes when you take the money out. With a Roth 401(k) plan, it’s the opposite: Your contributions are taxed up front, but you generally aren’t taxed on investment earnings or withdrawals.

In most cases, if you withdraw the money before age 59½, you’ll pay a 10% penalty.

Note: Whether your contributions are Roth or traditional (pretax), your employer’s matching contributions are treated as pretax. So if you contribute to a Roth 401(k), it’s as if you have two 401(k)s—a Roth (for which you’ll owe zero taxes in retirement) and a traditional (which will grow tax-deferred and will be taxed when you withdraw in retirement).

401(k) investments. You can choose how you want to invest your 401(k) contributions according to your retirement goals and how much risk you’re willing to take on. However, your investment choices may be limited to a few options preselected by your employer.

If you’re auto-enrolled into a 401(k) plan, your employer may pick a default portfolio for you. You can either keep that portfolio or choose a new one that more closely aligns with how much risk you want to take on, as well as the amount of time you have until retirement.

“IRA” stands for individual retirement arrangement, but an IRA is more commonly known as an individual retirement account. There are many different types of IRAs that you can open, including traditional (pretax) and Roth (after-tax) IRA plans.

Other types of IRAs include simplified employee pension (SEP) and savings incentive match plan for employees (SIMPLE) IRAs, which are typically used by self-employed individuals and small businesses. SEPs and SIMPLEs come with their own sets of rules, restrictions, and limits. The information in this section pertains to traditional and Roth IRAs only.

Eligibility. You must have a job and have earned income for the tax year to open an IRA. Earned income is money you make from working, such as your salary, bonuses, tips, and self-employment income. Income from investments, Social Security, unemployment, annuities, and pensions doesn’t count. If you want to open a Roth IRA, specific income limits apply.

You can also fund an IRA for your spouse if you’re married and file your taxes jointly, even if they have little or no earned income.

IRA contribution limit. With IRAs, the IRS limits how much you can contribute in any given tax year. For 2024 and 2025, the IRA contribution limit is $7,000 if you’re under age 50. If you’re age 50 or over, you’re allowed an additional $1,000 catch-up contribution, for a total of $8,000.

Matching contributions. Because an IRA is not an employer-sponsored plan, there are no matching contributions; you open and fund the account yourself.

Vesting. You own your IRA contributions from day one—there is no vesting schedule.

Taxes. Traditional and Roth IRAs work the same way as the 401(k) plans described above. If you contribute to a traditional IRA, you won’t be taxed on that money or any investment earnings, but you’ll pay taxes when you withdraw the money in retirement. Alternatively, you could contribute after-tax money to a Roth IRA. In that case, the withdrawals are tax-free.

You can save after-tax dollars in a Roth IRA plan, and generally you won’t be taxed on the investment income or qualified withdrawals.

As with a 401(k), you’ll pay a 10% penalty for withdrawing money from your IRA before age 59½, except in specific situations:

IRA investments. IRAs are usually held at a bank or brokerage firm, and you have ultimate discretion over the investment allocation. Generally speaking, that means you get access to a much wider selection of investment choices with an IRA than with a 401(k)—stocks , bonds, ETFs, and even some alternative investments are allowed.

When it comes to choosing an IRA versus a 401(k), here are some things to keep in mind:

Still deciding between an IRA versus a 401(k)? Do some scenario planning. Does your employer offer a 401(k) with a match, and are you happy with the investment choices? The 401(k) is the way to go. Does your employer have a plan with no match and/or you want more investment flexibility? You might go with an IRA. Did you max out your 401(k) and you’re eligible to put more away? Perhaps you choose to invest in both.

Now expand your scenarios to include Roth versus traditional versions. And then get started. When it comes to investing, time is money.