The core difference: who sets up the account and who contributes

A 401(k) is a retirement account your employer offers and manages. Your employer sets the rules, chooses the investment options, and often contributes money on your behalf (called a match). You contribute through automatic payroll deductions.

An IRA (Individual Retirement Account) is an account you open yourself, usually through a bank or brokerage firm. You control which investments go in it, and you decide how much to contribute each year, within legal limits. No employer is involved.

The practical result: if your employer offers a 401(k), you get one through work. If you're self-employed, a freelancer, or your employer doesn't offer a plan, you open an IRA on your own. Many people have both.

Key Takeaways

  • A 401(k) comes through your employer and lets them contribute matching funds; an IRA you open yourself and fund entirely on your own.
  • 401(k) contribution limits are much higher than IRA limits, so if you can save aggressively, a 401(k) lets you put away more money each year.
  • IRAs give you more control over investment choices; 401(k)s limit you to options your employer's plan offers.
  • Both accounts delay taxes on your money's growth, but the tax treatment at withdrawal differs between traditional and Roth versions of each.
  • If your employer matches 401(k) contributions, that's assistance programs—capture it before prioritizing an IRA.

Contribution limits: how much you can put in each year

For 2024, you can contribute up to $23,500 to a 401(k). If you're 50 or older, you can add an extra $7,500 catch-up contribution, bringing your total to $31,000. These limits reset each January.

For an IRA, the limit is $7,000 per year (or $8,000 if you're 50 or older). That's roughly one-third of what a 401(k) allows. These limits also reset each January and may change in future years.

If you earn a lot and want to save aggressively for retirement, a 401(k) is the only way to shelter that much income from taxes in a single year. An IRA alone won't get you there.

Employer matching: assistance programs in a 401(k)

Many employers offer to match your 401(k) contributions—typically 50 cents to a dollar for every dollar you contribute, up to a certain percentage of your salary. This is immediate, may provide income added to your retirement account.

An IRA has no employer match because there is no employer involved. If your employer offers a match, you should contribute enough to your 401(k) to capture it before putting money into an IRA. Passing up a match is leaving money on the table.

The match amount varies by employer. Some match 3 percent of salary, others 6 percent. Check your plan documents or ask your HR department what your employer offers.

Investment choices and control

A 401(k) plan offers a menu of investment funds—usually 10 to 30 options—chosen by your employer. You pick from that menu. You cannot invest in individual stocks, real estate, or other assets outside the plan's offerings.

An IRA gives you access to nearly any investment: individual stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more. If you want to build a specific portfolio or invest in particular companies, an IRA offers that freedom. A 401(k) does not.

For most people, the 401(k) menu is sufficient. But if you're an experienced investor or have strong preferences about where your money goes, an IRA's flexibility matters.

Tax treatment: traditional vs. Roth

Both 401(k)s and IRAs come in two tax flavors: traditional and Roth. The difference is when you pay taxes on the money.

With a traditional 401(k) or IRA, you contribute money before taxes are taken out. Your contribution reduces your taxable income for that year. The money grows tax-free inside the account. When you withdraw it in retirement, you pay income tax on the full amount.

With a Roth 401(k) or Roth IRA, you contribute money after taxes have already been taken out. Your contribution does not reduce your taxable income. The money grows tax-free inside the account. When you withdraw it in retirement, you pay no tax on it.

A Roth makes sense if you expect to be in a higher tax bracket in retirement or if you want tax-free withdrawals later. A traditional account makes sense if you want to lower your taxable income right now. Your income level may also limit whether you can contribute to a Roth IRA—high earners phase out of Roth contributions, though Roth 401(k)s have no income limit.

Withdrawal rules and penalties

With a traditional 401(k) or IRA, you must start taking withdrawals at age 73 (as of 2023; this age has been rising gradually). These are called required minimum distributions (RMDs). If you don't take them, you face a steep penalty.

With a Roth IRA, there are no required minimum distributions during your lifetime. You can leave the money untouched as long as you want. A Roth 401(k) does require RMDs, though you can roll it into a Roth IRA to avoid them.

If you withdraw money before age 59½, you typically pay income tax on the withdrawal plus a 10 percent penalty—with some exceptions (hardship, disability, first-time home purchase for IRAs only). A 401(k) may allow loans against your balance, which an IRA does not.

What happens when you leave your job

When you leave an employer, your 401(k) stays in that plan until you decide to move it. You have several options: leave it where it is, roll it into an IRA (called a rollover), or roll it into your new employer's 401(k) if they accept rollovers.

A rollover to an IRA gives you more investment control and usually lower fees. It's a common move. The money stays tax-deferred, and you don't pay taxes or penalties as long as you complete the rollover correctly (usually within 60 days).

If you leave the money in your old employer's plan, you keep the same investment options and rules. Some plans charge higher fees for former employees, so rolling over is often the better choice.

Self-employed and freelancer options

If you don't have an employer offering a 401(k), you can open a SEP IRA or Solo 401(k) (also called an individual 401(k)). These are designed for self-employed people and small business owners.

A SEP IRA lets you contribute up to 25 percent of your net self-employment income, up to $69,000 per year (2024 limit). It's simple to set up and maintain.

A Solo 401(k) allows higher contributions if you have significant self-employment income, and it offers loan options that a SEP IRA does not. It requires more paperwork to administer.

Both are better than a regular IRA if you're self-employed, because they let you save much more each year.

Frequently Asked Questions

Should I max out my 401(k) before opening an IRA?

No. If your employer offers a match, contribute enough to capture the full match first. After that, many people open an IRA because the investment choices are better and fees are often lower. Once your IRA is maxed, then put extra money back into the 401(k).

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

Yes. You can contribute to both in the same year, as long as you stay within each account's contribution limit. However, if you have a traditional IRA and a 401(k), your traditional IRA contributions may not be tax-deductible depending on your income—check the IRS rules for your situation.

What if my employer doesn't offer a 401(k)?

Open an IRA on your own through a bank or brokerage. If you're self-employed, consider a SEP IRA or Solo 401(k) to save more. You're not locked out of retirement savings just because your employer doesn't offer a plan.

Can I withdraw from my 401(k) or IRA early without a penalty?

Generally, withdrawals before age 59½ trigger a 10 percent penalty plus income taxes. IRAs allow exceptions for first-time home purchases (up to $10,000 lifetime) and certain hardships. 401(k)s may allow loans instead of withdrawals. Talk to a tax professional before withdrawing early.

Which account should I choose if I'm just starting out?

If your employer offers a 401(k) with a match, start there and capture the match. Then open an IRA if you want more investment control or have money left to save. If your employer doesn't offer a 401(k), open an IRA immediately—even small contributions add up over time.