Compare 401(k) and IRA: Tax Benefits, Limits, and More

Planning for retirement can feel overwhelming, especially with so many account options available. Two of the most common—and powerful—ways to save are 401(k) plans and Individual Retirement Accounts (IRAs). While both offer tax advantages, they differ in several important ways that can impact how you build wealth for retirement.

In this post, we’ll break down the key differences and help you decide which plan—or combination—might best suit your financial goals.

What Is a 401(k)?

A 401(k) is a retirement savings plan offered by employers that allows you to contribute a portion of your paycheck before taxes are taken out. Many employers also match part of your contributions, which is essentially free money for your retirement.

What Is an IRA?

An IRA, or Individual Retirement Account, is a tax-advantaged savings account you can open on your own through a bank, brokerage, or financial institution. It gives you more control over your investments compared to most employer-sponsored plans.

Contribution Limits in 2025

• 401(k): $23,500 annually, or $31,000 for those age 50 and older.
• IRA: $7,000 annually, or $8,000 for those age 50 and older.

Tax Advantages: Traditional vs. Roth

Both 401(k)s and IRAs come in Traditional and Roth formats. The main difference lies in when you pay taxes—either now or later.

• Traditional: Contributions are tax-deductible; taxes are paid upon withdrawal.
• Roth: Contributions are after-tax; withdrawals in retirement are tax-free.

Income Eligibility and Access

• 401(k): No income limits; depends on employer availability.
• IRA: Available to anyone with earned income, though Roth eligibility phases out at higher incomes.

Investment Options

• 401(k): Limited options chosen by employer.
• IRA: Wide range including stocks, bonds, mutual funds, and ETFs.

Employer Contributions

401(k)s often include employer matching, which is essentially free money toward your retirement. IRAs are funded solely by the individual.

Required Minimum Distributions (RMDs)

• Traditional 401(k)/IRA: RMDs start at age 72.
• Roth 401(k): RMDs required starting at 72.
• Roth IRA: No RMDs during the account holder’s lifetime.

Early Withdrawal Rules

• 401(k) & Traditional IRA: 10% penalty before age 59½ unless exceptions apply.
• Roth IRA: Contributions can be withdrawn anytime; earnings may be taxed/penalized if withdrawn early.

Portability and Rollovers

401(k) funds can be rolled into an IRA or a new employer’s plan when you switch jobs. IRAs can be transferred between custodians and sometimes into a 401(k) if allowed.

So, Which Should You Choose?

In many cases, the best approach is a combination:

• Start with your 401(k) to get the full employer match.
• Contribute to a Roth IRA for tax-free growth and flexibility.
• If you still have funds, go back and max out your 401(k).

Final Thoughts

Both 401(k)s and IRAs are valuable tools for building your retirement nest egg. Understanding their unique features allows you to make smart, informed choices that align with your financial future.

Still unsure? Consider speaking with a financial advisor to tailor your retirement savings strategy to your unique goals and lifestyle.