The Difference Between a 401(k) and an IRA: A Simple Guide

When it comes to saving for retirement, two account types dominate the conversation: 401(k)s and IRAs. While both offer tax advantages for retirement savings, they have important differences that can impact your financial strategy.

What is a 401(k)?

A 401(k) is an employer-sponsored retirement plan. You contribute a portion of your salary before taxes are taken out, and many employers offer matching contributions.

401(k) Key Features:

• Higher contribution limits (2025: $23,500, or $31,000 if 50+)
• Potential employer matching
• Limited investment options chosen by your employer
• Required minimum distributions starting at age 73

What is an IRA?

An Individual Retirement Account (IRA) is a personal retirement account that you open and manage yourself, offering more investment flexibility.

IRA Key Features:

• Lower contribution limits (2025: $7,000, or $8,000 if 50+)
• Wide range of investment options
• Traditional or Roth options available
• More flexibility in withdrawals and conversions

Traditional vs. Roth

Both 401(k)s and IRAs come in traditional and Roth varieties:

Traditional Accounts:

• Tax deduction now, pay taxes in retirement
• Good if you expect to be in a lower tax bracket in retirement

Roth Accounts:

• No tax deduction now, tax-free withdrawals in retirement
• Good if you expect to be in a higher tax bracket in retirement

Which Should You Choose?

The best strategy often involves using both:

1. Start with your 401(k) - Contribute enough to get the full employer match
2. Max out an IRA - Take advantage of more investment options
3. Return to your 401(k) - Use the higher contribution limits

Special Considerations

Income limits may restrict your ability to contribute to Roth accounts or deduct traditional IRA contributions. High earners should explore backdoor Roth conversions and mega backdoor Roth strategies.

The Bottom Line

Both 401(k)s and IRAs are powerful retirement savings tools. The key is to start saving as early as possible and maximize the tax advantages available to you.