What is a 401(k)?
A 401(k) is a tax-advantaged retirement account sponsored by an employer.
Investments grow tax-free, and taxes are paid when money is withdrawn in retirement.
Employers may offer to match invested funds, and may offer flexible loans against your 401(k).
What is an IRA?
An individual retirement account (IRA) is a retirement account anyone with earned income can open.
You pick the provider (such as Fidelity, Vanguard, and others), choose the investments, allocation, and set up automatic contributions.
Contributions can be made with pre-tax dollars up to the allowable limit, and you pay tax when you withdraw the money in retirement.
401(k)s, and IRAs can be traditional and Roth.
Unlike traditional accounts, which work the opposite way, Roth accounts allow you to pay tax when contributions are made, meaning you do not pay tax on withdrawals.
In this article, we will discuss traditional 401(k)s and IRAs.
What are the similarities between a 401(k) and an IRA?
401(k)s and IRAs have a few similarities, such as:
| 401(k) | IRA | |
|---|---|---|
| Tax | Pay tax when withdrawn in retirement. | Pay tax when withdrawn in retirement |
| Income limits | None | None |
| Withdrawals | Can start at 55 if you leave your job. | Retirement age at 59 ½, or for an exception outlined by the IRS. |
| Penalties | Penalties on early withdrawals of 10%. | Penalties on early withdrawals of 10%. |
| Required minimum distributions (RMDs) | Yes | Yes |
Tax
The tax treatment for 401(k)s and IRAs is similar. You pay income tax in retirement on the money you withdraw.
Income limits
Unlike Roth accounts, IRAs and 401(k)s do not have income limits.
Withdrawals
Withdrawal rules work the same for IRAs and 401(k)s as well. The retirement age is 59 ½, when you can start making withdrawals without incurring a penalty.
Penalties
Penalties are similar for a 401(k) and an IRA, with a few differences. The penalty for withdrawing your money from a 401(k) or an IRA is 10%. You’ll pay income taxes on the money you withdraw as well. There are exceptions, such as disability, the birth or adoption of a child, emergency expenses, and others outlined by the IRS.
Required minimum distributions
Both IRAs and 401(k)s have required minimum distributions (RMDs) starting at age 73. In other words, you’ll be required to take a distribution if you haven’t been.
What's the difference between an IRA and a 401(k)?
IRAs and 401(k)s have some differences that may cause you to choose one over the other. These differences include:
| 401(k) | IRA | |
|---|---|---|
| Sponsor | Employer | Self |
| Investment options | Limited to those available with your employer’s plan. | Any investment available with your provider. |
| Contributions limits | Up to $24,500 for 2026 | $7,500 per year ($8,600 if over age 50) |
| Employer contributions | Employer matches | None |
| Loans | Yes, if the employer’s plan allows | No |
Sponsor
A 401(k) is sponsored by your employer, while anyone can open an IRA.
Investment options
With a 401(k), your investment options are limited to the options your employer has available with the plan provider.
Contribution limits
A 401(k) has much higher limits than an IRA. The most recent limits for 2026 are $24,500 for a 401(k) and $7,500 for an IRA.
Employer contributions
One of the main advantages of a 401(k) over an IRA is employer contributions. It’s common to receive some type of match from your employer for funds invested in your 401(k). The employer determines the amount.
Loans
While IRAs do not offer loans, 401(k)s may (depending on your employer). You may be able to take out up to 50% of the vested balance of your 401(k) without a credit check. You pay yourself back in installment payments. However, it’s important to remember that a 401(k) loan will eat into your retirement savings, which could leave you with less saved in retirement.
Can you contribute to an IRA and a 401(k)?
Yes, you can contribute to both an IRA and a 401(k).
You may have an employer that offers a 401(k) – and possibly a matching contribution – that you’ll want to take advantage of. However, you may have limited investing options within that account. You’ll also likely need to roll it over once you leave your employer.
An IRA is an account you can open yourself. You’ll likely have more investment options and be able to control the investment decisions.
You may want a 401(k) for the employer match, and an IRA to manage your own investments.
401(k) vs. IRA: What are the pros and cons?
401(k)s and IRAs each have their pros and cons.
Pros of 401(k)
Contribution limit: A 401(k) has a higher contribution limit than an IRA.
Employer match: You may offer a match on funds contributed to a 401(k).
401(k) loans: It may be possible to borrow from your 401(k), depending on your employer, which is a great advantage if you need it.
Lower taxes now: You can lower your taxable income now by contributing money to your 401(k). May lower your taxable income.
Easy payroll deductions: When your 401(k) is with your employer, it’s easy to take money out of your paycheck for savings.
Investments grow tax-free: You won’t pay taxes on the growth of your portfolio until you withdraw the funds at retirement.
Cons of 401(k)
401(k) penalties: There is a 10% penalty on funds withdrawn before retirement age (with some exceptions).
Employer-dependent: If you leave your employer, you’ll likely need to roll over your 401(k).
Fewer investment choices: What you can invest in with your 401(k) is limited to the plan choices selected by your employer.
Pros of IRA
Lower taxes now: You can lower your taxable income now by contributing money to your IRA.
Investments grow tax-free: You won’t pay taxes on the growth of your portfolio until you withdraw the funds at retirement.
More selection and control: Opening your own IRA offers you the opportunity to choose the provider and manage the investments and allocation, giving you more control over your portfolio.
No income limit: You can contribute to an IRA no matter what income level you’re at.
Cons of IRA
Lower contribution limit: IRAs have a lower contribution limit than 401(k)s.
No contributions from an employer: You won’t have matching funds from an employer in your IRA, as you may in a 401(k).
IRA penalties: Like a 401(k), there is a 10% penalty on funds withdrawn before retirement age (with some exceptions).
Is an IRA better than a 401(k)?
The better retirement account depends on your individual circumstances and needs.
Some of the key differences to help you decide which offers benefits to suit your needs better may include:
An IRA allows you more control and has more investment options.
A 401(k) has a higher contribution limit.
A 401(k) sponsored by your employer may come with matching funds.
Both an IRA and a 401(k) offer possible tax benefits when you contribute.
Bottom line
Professional financial advice can help you set up a strong retirement plan. With expert guidance, you’ll know what accounts, investments, and asset allocation would help set up your retirement portfolio.
Unbiased offers an easy way to find an expert financial advisor to help with all your questions.
Get connected to a financial advisor from Unbiased today.