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.
Comparing IRAs and 401(k)s
401(k)s and IRAs are both tax-advantaged ways to help individuals save for retirement. However, the way they operate when it comes to taxation, eligibility, contribution limits and other factors varies. The table below breaks down the key differences between the two types of accounts.
| Account | 401(k) | IRA |
|---|---|---|
| Contribution limits | $23,500 in 2025 | $7,000 in 2025 |
| Catch-up contribution (50 and over) | $7,500 in 2025 | $1,000 in 2025 |
| Higher catch-up contribution for 2025 (60, 61, 62, 62 years of age) | $11,250 in 2025 | Not applicable. |
| Income limits | None. | Those with an AGI above the limit aren’t eligible to contribute to a Roth IRA. |
| Employer match | Determined by the employer. | Not applicable. |
| Eligibility | Determined by the employer as long as requirements are not more restrictive than IRS guidelines. | Must have earned income that does not exceed certain IRS thresholds. |
| Taxation on contributions | Pre-tax contributions can lower taxable income and AGI. | Pre-tax contributions may be tax-deductible up to a certain AGI. |
| Taxation on growth | Investment grows tax-deferred, tax-free for Roth 401(k)s. | Investment grows tax-deferred, tax-free for Roth IRAs. |
| Taxation on withdrawals | Taxed as income in retirement, tax-free for Roth 401(k)s. | Taxed as income in retirement, tax-free for Roth IRAs. |
| Investments | Available investments are determined by the employer. | Available investments are determined by the broker or IRA provider that holds the account. |
| Early withdrawals | 10% tax on early distributions (before age 59 1/2), but exceptions apply. May be allowed to take out a 401(k) loan to borrow from balance, but it needs to be repaid with interest. |
10% tax on early distributions (before age 59 1/2), but exceptions apply. May withdraw contributions to a Roth IRA at any time tax- and penalty-free as long as the account has been open for 5 years. |
| Required minimum distributions (RMDs) | Starting at age 73. | Starting at age 73. For a Roth IRA, no RMDs while you’re alive, beneficiaries may face RMDs on an inherited IRA. |
Can you contribute to both an IRA and 401(k)?
As long as you meet eligibility requirements for each account, you can contribute to both an IRA and 401(k) in the same tax year up to the annual contribution limits.
For both IRAs and 401(k)s, the contribution limits still apply if you have multiple accounts. For example, if you have a traditional and Roth IRA, you may contribute to both accounts as long as the sum doesn’t exceed the annual contribution limit. Similarly, if you work at two companies where you’re eligible for a 401(k), you can participate in both plans, but you’ll be subject to the annual contribution limit for the two accounts combined.
Choosing between an IRA and 401(k)
Choosing between an IRA and 401(k) can be complex. However, there are instances where one retirement account may make more sense.
An IRA may make sense in many cases, including when:
- You’re self-employed
- You don’t have access to an employer-sponsored retirement plan at your job
- You want more control over your investments
A 401(k) may make sense in many cases, including:
- You receive an employer match for your contribution
- You want to contribute a larger amount than an IRA allows
Before you commit to a 401(k) or IRA, be sure to assess the merits of each account alongside your long-term financial goals.
Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
