IRA vs. 401(k) – Which One is Better?

The best time to start saving for your retirement is right now. But with several retirement savings accounts available, where do you start? Two popular options for retirement planning are 401(k)s and individual retirement accounts (IRAs).

Both options offer tax advantages and the ability to boost your retirement savings through investments. A traditional 401(k) or IRA offers tax advantages the year you make contributions, which come from pre-tax dollars. A Roth 401(k) or IRA offers tax advantages when you withdraw money in retirement that are typically tax-free.^1,2

However, 401(k)s and IRAs work a little differently. Understanding what sets them apart from each other could help you decide how to weave one or both accounts into your retirement savings plan.

We’ve rounded up the basics to help you make smart, confident choices for your future.

What is a 401(k)?

A 401(k) is a retirement savings plan employers may provide to employees as part of their benefits package. The name comes from Section 401(k) of the Internal Revenue Code, which outlines the rules for these accounts. Contributions to a 401(k) grow through investments. You typically must select from investment options that your employer has already chosen.

Contributions

Usually, you make contributions to your 401(k) account with pre-tax funds deducted directly from each paycheck. Pre-tax funds are money you put into an account before taxes are taken out. These contributions can lower the taxable net income on your paycheck.

An employer-sponsored 401(k) plan usually offers a pre-set selection of options for investing a portion of your pay.

Many employers offer a 401(k) match, which means they add money to your retirement account based on how much you contribute. But instead of matching every dollar, they usually set a limit on how much they will match.

For example, if your employer offers a 4% match, they will add up to 4% of your salary to your 401(k) as long as you contribute that amount. If you earn $50,000 per year and put in 4% ($2,000), your employer will also add $2,000. But if you put in less, they will only match up to what you contribute.

If your employer offers a match, it’s a good idea to contribute at least enough to get the full amount. Otherwise, you’re missing out on free money that could help grow your savings for the future.

401(k)s have much higher contribution limits than IRAs. In 2025, 401(k) annual contribution limits went up to $25,300 per individual. People over age 50 may deposit an additional $7,500 per year.¹ If you’re between 60 and 63, you could put up to $11,250 extra into your 401(k).

You typically only put money in a 401(k) account while you work for the company providing the benefit. If you leave the job, you could leave your money in the open account, but you won’t be able to add funds to it, and depending on the plan, you might have to pay some management fees. You could also roll your 401(k) into an IRA, transfer the account to a new employer, or withdraw the funds—though withdrawals before retirement age come with taxes and early withdrawal penalties.

401(k) Vesting

When you contribute to a 401(k), the money you put in is always yours — 100% owned by you, no matter what. However, the value of your account can fluctuate based on the investments you choose. Your decisions — such as which investment vehicles to use, how much to invest, and how you allocate your 401(k) balance — will influence how your account performs over time.

However, the money your employer contributes may not be yours right away. Many employers use a vesting schedule, which means you gradually gain ownership of their contributions over time. If you leave the company before you’re fully vested, you may forfeit some or all of the employer’s contributions.

If you leave the company before meeting the vesting requirement, you may lose a portion of the money your employer has added to your 401(k).

Some employers practice “graded vesting,” which means your ownership over employer contributions gradually increases the longer you stay at a company. For example, you might own 25% after one year of employment, 50% after two, 75% after three, and 100% after four.

Remember, you own your contributions to your 401(k) no matter how long you work for a company.

Distributions

With a traditional 401(k), you typically have to start taking payments from your retirement account starting April 1st of the year you turn 73. These payments are called “required minimum distributions (RMD).” Some 401(k) plans allow you to delay your required minimum distributions if you retire after age 73.

As of 2024, Roth 401(k)s are no longer subject to RMDs during the account holder’s lifetime. This change was introduced under the SECURE 2.0 Act, which aims to make retirement saving more flexible. That means you’re not required to take withdrawals from a Roth 401(k) in retirement, giving your savings more time to grow tax-free.²

What’s an IRA?

An IRA is a long-term savings account that allows any individual with "earned income" (or their spouse) to save for retirement. Earned income includes any money received in exchange for work, including contract work, self-employment or a salaried job.

When you add funds to an IRA, you typically invest the money in a range of financial products, such as:

• Stocks
• Bonds
• Mutual funds
• Exchange-Traded Funds (ETFs) This investment flexibility allows your retirement savings to potentially grow over time through capital appreciation and compound interest.³

There are two primary types of IRAs:

• Traditional IRA: Contributions may be tax-deductible, depending on your income level and whether you or your spouse are covered by a workplace retirement plan. The investments grow tax-deferred, meaning you won't pay taxes on earnings until you withdraw funds in retirement.

• Roth IRA: Contributions are made with after-tax dollars and are not tax-deductible. However, qualified withdrawals in retirement are tax-free, provided certain conditions are met. Understanding the distinctions between Traditional and Roth IRAs can help you choose the option that best aligns with your financial goals and retirement plans.

Contributions

As of 2025, the annual contribution limit for IRAs is $7,000 for individuals under age 50, and $8,000 for those aged 50 or older. It's important to note that these limits apply to the combined total of contributions to both Traditional and Roth IRAs.⁴

There’s no cutoff age for contributing to your IRA.

Distributions

Distributions work similarly for 401(k)s and IRAs. Traditional IRAs require you to start taking out at least the minimum required distributions from your retirement savings starting April 1st of the year you turn 73. Roth IRAs don’t have this requirement.⁵

401(k)	IRA
Offered by employers	Opened by individuals
Employers may match contributions	No employer-matched contributions
Limited investment choices	Many investment options
Traditional 401(k) contributions are tax-deferred; Roth 401(k) contributions are not	Traditional IRA contributions are tax-deferred; Roth IRA contributions are not
Traditional 401(k) withdrawals are taxed; Roth 401(k) withdrawals are not	Traditional IRA withdrawals are taxed; Roth IRA withdrawals are not

401(k) vs IRA – Which is better?

The right choice depends on your circumstances – and you can actually have multiple 401(k) and IRA accounts.

When to consider a traditional 401(k)

• Your employer offers matching contributions.
• You want to save on taxes by increasing your pre-tax deductions.
• You want to let your money grow tax-deferred. Just remember it can grow or lose value depending on how you invest.
• You expect to be in a lower tax bracket when you retire and begin paying taxes on withdrawals.

When to consider an IRA

• Your employer doesn’t offer a 401(k), or you’re self-employed.
• You expect to be in a higher tax bracket when you retire, so paying taxes on contributions to a Roth IRA may save money in the long term.
• You want to contribute up to the yearly limit and choose your own investments. Your money can grow — or lose value — depending on how you invest it in things like stocks, bonds, or other markets.

Can you have both a 401(k) and IRA?

Yes, many people maximize their retirement savings by opening both account types. If you maximize your 401(k) contributions, opening an additional IRA may help boost your savings.

If you want to benefit from your job’s 401(k) match offering but expect to be in a higher tax bracket when you retire, you might split the difference by contributing to your 401(k) up to the match amount and putting the rest into an IRA. That way, you could minimize your tax burden and maximize your retirement savings.

There’s power in planning

The best retirement planning options for you depend on your circumstances and goals. But for many, the best choice may be to have both a 401(k) and an IRA to prepare for retirement. Now that you have a better understanding of 401(k)s and IRAs, you can confidently build the best retirement plan for your future.

Sources:

1. https://www.forbes.com/sites/investor-hub/article/401k-contribution-limits/
   

2. https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs#:~:text=Withdrawals%20from%20Roth%20IRAs%20and,balance%20on%20December%2031%2C%202024.
   

3. https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras
   

4. https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000#:~:text=The%20limit%20on%20annual%20contributions,but%20remains%20$1%2C000%20for%202025.
   

5. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds
   

This article was updated since its original posting in 2022. Jessica Leshnoff and Kim Gallagher contributed to this article.