Individual retirement accounts, or IRAs, and 401(k) plans are tax-advantaged ways to save for retirement. There are several key differences between the two types of accounts, including that a 401(k) is an employer-sponsored retirement plan while an IRA is one you can open on your own, independent of any employer. These accounts also have different contribution limits, tax benefits and eligibility criteria.
Let’s explore the differences between IRAs and 401(k)s.
What is an IRA?
An IRA is a retirement investment vehicle you can have in addition to an employer-sponsored retirement account, like a 401(k), 403(b), or 457. There are two types of IRAs: traditional and Roth.
A traditional IRA is funded with pre-tax dollars, which grow tax-deferred until retirement. After age 59 1/2, you can take penalty-free withdrawals from a traditional IRA, which will be included in that year’s taxable income.
A Roth IRA is funded with after-tax dollars, which grow tax-free. After age 59 1/2, and assuming it’s been at least 5 years since your first contribution, you can take tax- and penalty-free withdrawals from the account, which are not included in your taxable income.
The contribution limit for an IRA in 2025 is $7,000 with a catch-up contribution of $1,000 for individuals aged 50 and over. While there are no income limits for a traditional IRA, you may not be eligible to contribute to a Roth IRA if you make over a certain amount. Similarly, if your adjusted gross income (AGI) is above a certain level, you may not be able to deduct contributions to a traditional IRA.
What is a 401(k)?
A 401(k) is an employer-sponsored retirement plan that allows you to invest money for your future. 401(k) plans, like IRAs, can be traditional or Roth. A traditional 401(k) uses pre-tax contributions, which may help lower taxable income and AGI. A Roth 401(k) uses after-tax contributions and has the benefit of tax-free growth and tax-free withdrawals in retirement.
Unlike IRA contributions, which may be limited or restricted for high-earning individuals, a 401(k) is generally available to qualifying individuals at a company regardless of compensation. Employers may also choose to incentivize employees to participate by offering a contribution to all participant accounts or matching contributions up to a certain percentage or amount. For example, an employer might match the first 3% of an employee’s 401(k) contributions, which would double the investment for employees who participate and set aside 3% of their earnings.
For tax year 2025, the contribution limit for a 401(k) is $23,500. Individuals aged 50 and over may also contribute up to $7,500 in catch-up contributions. Employees ages 60, 61, 62, and 63 can benefit from an even higher catch-up contribution limit of $11,250.
It’s important to note that the contribution limit for a 401(k) outlined above does not consider an employer match. An employer match may make the total contribution higher, though limits do still apply, and the invested amount cannot be more than 100% of an employee’s total compensation.
