Planning for retirement can be an overwhelming experience. There are many retirement accounts and investment options to choose from, and not all of them are right for every investor.
You’ve heard about 401k accounts, Roth IRAs, and Traditional IRAs. But what makes a 401k different from an IRA?
Here are five differences you should know about.
Keep in mind that when you’re planning for retirement, you’ll want to consult with a financial adviser. While this post will help you understand some of the basic differences between IRA and 401k accounts, determining which account is right for you should include tailored advice from a professional with knowledge of your individual situation.
1. Individual vs. employer
One key difference between IRA and 401k accounts is found in the account names themselves. IRAs (Individual Retirement Accounts) are accounts made by and tied to an individual, funded with out-of-pocket contributions. On the other hand, 401k accounts are sponsored by an employer and funded through payroll deductions.
Anyone can open a Roth IRA, and as long as you’re under 70-1/2, you can open a traditional IRA. But you can only participate in a 401k if your employer offers a plan.
2. Employer match
The most compelling reason to use a 401k account is an employer match. Organizations offering this benefit contribute to the employee’s retirement account by matching a portion of the employee’s 401k contribution.
Not all companies with 401k plans also offer an employer match, and the amount of match offered can vary greatly.
But most of the time, an employer match makes investing in a 401k an appealing option. When you contribute to a 401k with a company match, you’ll see immediate growth as your employer’s contributions are added to your account.
For example, if your employer matches every contribution you make, you would double your investment immediately. On top of that, a larger principal investment means you’ll more quickly see the effects of compounding gains.
It’s easy to see why employer match makes 401k accounts so popular: you’re essentially getting free money for your retirement account!
This is a benefit you don’t get from traditional or Roth IRAs.
3. Yearly contribution limits
Another major difference between IRA and 401k accounts is the yearly contribution limit.
A 401k has a much higher individual contribution limit. Consider the 2025 individual contribution limits:
- IRA: $7,000 ($8,000 if you’re over 50)
- 401k: $23,500 ($31,000 if you’re over 50)
Furthermore, any employer contributions don’t count against your 401k individual contribution limit. They instead count against the total 401k yearly contribution limit ($70,000 in 2025).
4. Investment flexibility
When you invest in an IRA account, your investment opportunities are similar to the opportunities you’d have in a normal brokerage account. In other words, your investment options are nearly limitless.
In comparison, 401k accounts typically have fewer investment options. You’re often limited to a small set of funds chosen by your employer.
Investment flexibility is one reason many people choose to max out their IRA contributions before investing in a 401k when their employer offers insignificant (or no) match.
5. Roth IRA contribution withdrawal
Both IRA and 401k accounts have specific conditions that must be met for penalty-free withdrawals. You’ll want to make sure you’re aware of these conditions before investing in either account.
One specific scenario to consider is your ability to withdraw your contributions (not gains) before reaching the required age.
In this scenario, a Roth IRA has a significant advantage. In a Roth IRA, you can make a distribution that only contains your contributions and not any earnings. This withdrawal can be made at any time, tax and penalty free.
This is a benefit limited to the Roth IRA. Neither 401k nor traditional IRA accounts can make these penalty-free contribution withdrawals.
Your road to retirement may include both
IRAs and 401k retirement accounts present different sets of benefits. Your outlook, investment goals, age, company match, and other individual factors should all be considered when choosing your investment strategy.
Retirement is about planning
When building your retirement plan, consider your options and talk to your financial adviser about what is best for you.
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