A 401(k) and an IRA are two separate types of retirement accounts with different rules, limits, and sources

A 401(k) is a retirement account your employer sets up and manages. An IRA (Individual Retirement Account) is an account you open and manage yourself, usually through a bank or brokerage firm. They are not the same thing, and you can have both at the same time. The key differences lie in who runs the account, how much you can contribute each year, what happens to the money if you leave your job, and whether your employer adds money to it.

The name "401(k)" comes from the section of the tax code that created it. An IRA is governed by different tax rules. Both let your money grow tax-deferred, but the contribution limits, withdrawal rules, and employer involvement are different enough that understanding which one you have matters when you plan to move money or retire.

Key Takeaways

  • A 401(k) is run by your employer; an IRA is an account you open and control yourself through a bank or brokerage.
  • Your employer can contribute to your 401(k) as a match or profit-sharing; an IRA receives only your own contributions unless you roll money into it.
  • The annual contribution limit for a 401(k) is higher than for an IRA, but 401(k) plans often charge fees that IRAs do not.
  • When you leave a job, you can roll your 401(k) balance into an IRA, but you cannot move an IRA into a 401(k) unless your new employer allows it.
  • Both accounts offer tax advantages, but the type of tax break (now or later) depends on whether you choose a traditional or Roth version of each.

Who owns and manages the account

Your employer owns and operates your 401(k). Your employer chooses the plan provider (the company that holds the money and keeps the records), decides which investment options you can pick from, and sets the rules for when you can withdraw money. You do not choose the provider or the investment menu—you work with what your employer offers.

An IRA is yours alone. You open it at a bank, credit union, brokerage firm, or investment company of your choice. You decide where to open it, what to invest in (within the options that institution offers), and when to move it to a different institution if you want to. No employer involvement is required, and no employer can tell you what to do with it.

Employer contributions and matching

Many employers add money to your 401(k) as a match—typically 50 cents to a dollar for every dollar you contribute, up to a certain percentage of your salary. Some employers also add profit-sharing contributions. This employer money is assistance programs for retirement, and it is one of the biggest reasons to use a 401(k) if your employer offers one.

An IRA receives no employer contributions. The money in an IRA comes only from you. If you roll a 401(k) into an IRA when you leave your job, that rolled-over money stays in the IRA, but your new employer cannot add to it. If you want employer matching again, you would need to contribute to a new 401(k) at your next job.

Annual contribution limits

For 2024, you can contribute up to $23,500 to a 401(k) if you are under age 50. If you are 50 or older, you can add an extra $7,500 catch-up contribution, for a total of $31,000. These limits change each year based on inflation.

For an IRA, the 2024 limit is $7,000 if you are under 50, or $8,000 if you are 50 or older. The IRA limit is much lower, but you can have both a 401(k) and an IRA at the same time, so you could theoretically contribute to both in the same year (though income limits may restrict IRA contributions if you also have a 401(k)).

What happens when you leave your job

When you leave your job, your 401(k) stays in the plan until you decide to move it. You have several options: leave it where it is (if the balance is above a certain amount, usually $5,000), roll it into an IRA, roll it into your new employer's 401(k) if they allow it, or cash it out. If you cash it out before age 59½, you will owe income tax on the full amount plus a 10% early withdrawal penalty, unless an exception applies.

A rollover from a 401(k) to an IRA is common and usually tax-free if done correctly. The money moves directly from the 401(k) plan to the IRA without you touching it. This is called a direct rollover. Once the money is in an IRA, you control it and can invest it however you want, often with more investment choices than your old 401(k) offered.

An IRA does not change when you change jobs. It stays exactly where you opened it, growing at its own pace. You can open an IRA whether or not you have a job, and you can keep contributing to it as long as you have earned income.

Investment choices and fees

A 401(k) limits you to the investments your employer's plan offers—usually a menu of 10 to 30 mutual funds or target-date funds. You cannot buy individual stocks, bonds, or other investments outside that menu. Many 401(k) plans also charge administrative fees, investment fees, or both. These fees are sometimes visible on your statement and sometimes buried in the fund expense ratios.

An IRA typically offers far more investment choices. You can buy individual stocks, bonds, ETFs, mutual funds, or other investments depending on where you open the account. An IRA at a discount brokerage like Fidelity or Schwab may charge little or nothing in administrative fees, though the investments themselves may have their own expense ratios.

Tax treatment: traditional versus Roth

Both 401(k)s and IRAs come in traditional and Roth versions. A traditional 401(k) or traditional IRA lets you deduct your contributions from your taxes now, and you pay income tax on withdrawals in retirement. A Roth 401(k) or Roth IRA takes contributions after tax, but withdrawals in retirement are tax-free.

The choice between traditional and Roth depends on whether you think your tax rate will be higher or lower in retirement. If you expect to be in a lower tax bracket when you retire, traditional makes sense. If you expect to be in a higher bracket, Roth may save you money. Both types of accounts grow tax-deferred, meaning you do not pay tax on investment gains year to year—only when you withdraw.

Frequently Asked Questions

Can I have both a 401(k) and an IRA at the same time?

Yes. You can contribute to both in the same year. However, if you have a 401(k) at work, income limits may reduce how much you can contribute to a traditional IRA and still deduct it from your taxes. Roth IRA contributions have their own income limits. Check the current limits based on your income and filing status.

What happens to my 401(k) if I get fired or laid off?

Your 401(k) balance remains yours. Your employer cannot take it back. You can leave it in the plan, roll it to an IRA, roll it to a new employer's plan, or withdraw it (though early withdrawal before age 59½ triggers a 10% penalty plus income tax unless an exception applies). You have time to decide—there is no immediate deadline.

Can I roll an IRA into a 401(k)?

Only if your new employer's 401(k) plan allows it, and not all plans do. You would need to ask your new employer's benefits department whether they accept IRA rollovers. If they do, the process is straightforward, but you cannot force a plan to accept an IRA rollover.

Which account should I prioritize if I can only contribute to one?

If your employer offers a 401(k) match, contribute enough to get the full match first—that is assistance programs. Then, if you have extra to save, an IRA often offers lower fees and more investment choices. After maxing the IRA, go back to the 401(k) if you have more to save.

Do I have to withdraw money from a 401(k) or IRA at a certain age?

Yes. Traditional 401(k)s and traditional IRAs require you to start taking withdrawals at age 73 (as of 2023, under the SECURE 2.0 Act). Roth IRAs do not require withdrawals during your lifetime, but Roth 401(k)s do. The amount you must withdraw is calculated based on your age and account balance.