IRA versus 401(k): What’s the difference?

If you’re eligible, it’s possible you could contribute to both a 401(k) and an individual retirement account (IRA), so it may be helpful to know how they compare from a contribution, withdrawal and tax perspective. Here’s a look at their similarities and differences.

IRA and 401(k) definitions

A 401(k) is a type of employer retirement plan. Depending on the industry you work in, your workplace plan may be called a 403(b) or 457. Additionally, depending on your workplace plan, you may also have access to a Roth 401(k).

An IRA is an individual retirement account that you open with a financial institution, either a bank or a brokerage firm. Types of IRAs available include traditional IRAs, Roth IRAs and even options for self-employed individuals and small business owners.

IRA and 401(k) contributions and investment selections

There’s a difference in how you fund 401(k)s and IRAs, as well as the investment options available to you.

401(k)

• Eligility Most employers have certain qualifications you must meet to participate in their 401(k) savings plan, such as being at least 21 and employed with the organization for at least one year.
• Contribution details 401(k) contributions are directly withdrawn from your paycheck with pre-tax dollars.
• Annual contribution limit The annual combined 401(k) limit for 2026 is $24,500. If you’re age 50-59 or 64 and older, you can contribute an additional $8,00. If you’re age 60-63, you can contribute an additional $11,250.
• Employer match Yes; varies by employer, with average match of 4.6% of income. ¹
• Investment selection Generally chosen by your employer; more than one type of portfolio may be offered.

Roth 401(k)

• Eligility Dependent on availability within your employer plan.
• Contribution details Roth 401(k)s are funded with after-tax dollars.
• Annual contribution limit The annual combined 401(k) limit for 2026 is $24,500. If you’re age 50-59 or 64 and older, you can contribute an additional $8.000. If you’re age 60-63, you can contribute an additional $11,250.
• Employer match Yes; varies by employer. Your employer will allocate any match contributions into a pre-tax account.
• Investment selection Generally chosen by your employer; more than one type of portfolio may be offered.

Traditional IRA

• Eligility Anyone with earned income is eligible to open and contribute to a traditional IRA.
• Contribution details Traditional IRAs can be funded with after-tax dollars or as tax-deductible contributions.
• Annual contribution limit The combined annual limit for traditional and Roth IRAs is $7,000 for the 2025 tax year and $7,500 for the 2026 tax year. If you’re age 50 or older you can contribute an additional $1,000 for the 2025 tax year and $1,100 for the 2026 tax year.
• Employer match None.
• Investment selection You can choose the investments for your portfolio.

Roth IRA

• Eligility Roth IRA eligibility is based on income level. Read more about Roth IRAs.
• Contribution details Roth IRAs are funded with after-tax dollars.
• Annual contribution limit The combined annual limit for traditional and Roth IRAs is $7,000 for the 2025 tax year and $7,500 for the 2026 tax year. If you’re age 50 or older you can contribute an additional $1,000 for the 2025 tax year and $1,100 for the 2026 tax year.
• Employer match None.
• Investment selection You can choose the investments for your portfolio.

IRA and 401(k) taxes and withdrawals

Traditional 401(k)s and traditional IRAs have more in common when it comes to tax benefits, distribution and withdrawal requirements. They’re considered tax-advantaged investment accounts, since contributions are either pre-tax or tax-deductible.

Roth IRAs and Roth 401(k)s are considered tax-free investment accounts, since distributions and qualified withdrawals aren’t taxed.

Traditional 401(k) + traditional IRA

• Tax implications Pre-tax or tax-deductible contributions. Contributions grow tax-deferred, and withdrawals are taxed as ordinary income.
• Tax penalties for early withdrawal 10% penalty tax if money is withdrawn before age 59 ½, but certain exceptions may apply to your situation. Read about 401(k) and IRA withdrawal rules.
• Required minimum distributions (RMDs) You must begin taking required minimum distributions (RMDs) from traditional IRAs and traditional 401(k)s at age 73. You’re required to withdraw a certain amount each year, calculated based on your age and the value of your accounts. One exception—you may delay taking RMDs from your employer retirement plan if you’re still working and do not own more than 5% of the business you work for.

Roth 401(k) + Roth IRA

• Tax implications Non-deductible contributions and tax-deferred growth. Tax-free withdrawals on contributions; tax-free withdrawals on earnings if you’ve owned the account for five years and are older than 59 ½.
• Tax penalties for early withdrawal Withdrawals of earnings before age 59 ½ are subject to a 10% penalty tax. There are situations in which you can make early withdrawals without penalty. Read about 401(k) and IRA withdrawal rules.
• Required minimum distributions (RMDs) No minimum distributions required during the Roth account owner or spouse’s life. Read about distribution requirements for an inherited IRA.

Is an IRA or 401(k) better suited for your needs?

• Consider a 401(k) if your employer offers a company match.
• If flexibility is important, a traditional IRA or Roth IRA allows you to choose your investments. However, you should factor sales charges, maintenance and transaction fees, and expense ratios into your decision.
• You can open a Roth IRA or traditional IRA for a non-working spouse.
• If your priority is to lower your taxable income, a traditional 401(k) or traditional IRA can help with that. Whatever you contribute, your taxable income may be lowered by that amount. However, IRA contribution limits are significantly lower than 401(k)s.
• If access to funds is a priority, consider a Roth IRA, which allows you to withdraw your contributions at any time. If you withdraw earnings, however, they may be subject to taxes and penalties. 

Learn about your options for opening an IRA.