IRA vs 401(k): Which retirement plans are better?

Americans have several options when it comes to saving for retirement. Two of the most popular options are the 401(k) plan and an individual retirement account (IRA). According to the Investment Company Institute (ICI), the assets under the 401(k) plan totaled $8.9 trillion as of 2024. Meanwhile, the IRA had a massive balance of $17.0 trillion over the same period, ICI says.

Many people confuse the two plans and understand them by considering the similarities. Both offer the ability to invest in assets such as stocks and mutual funds with potential returns that are higher than savings accounts and bonds, such as stocks and mutual funds with higher potential returns than savings accounts and bonds.

Below are the important ways in which the 401(k) and the IRA are different.

What is an IRA?

An IRA is an individual retirement account that allows those with income (and even spouses) to save on a tax-based retirement basis. Within the IRA, your money will be tax-free or tax-rised until you take it out when you retire. This special tax advantage allows money to deteriorate at a higher speed, allowing more accumulation over time.

The annual contribution limit for IRAs is $7,000 in 2025, but this figure usually rises every few years. Those ages 50 and above can donate an additional $1,000 each year.

You can open an IRA in a variety of financial institutions, such as banks and brokers, and you can purchase several types of assets within the IRA, such as CDs, stocks, bonds, mutual funds, ETFs and more. The best IRA account allows you to invest in potentially highly reverted assets such as stocks and equity capital.

Types of IRAs

There are two main types of IRAs, and the tax benefits they offer you differently.

• Traditional IRA You can save for retirement on a pre-tax basis. This means you cannot pay tax on donations to your account. Money in your account can increase tax deferral until you retrieve it on retirement, defined as the age of 59 or older. When you withdraw money, you will pay taxes at your normal income rate. After age 73, you will be forced to obtain the minimum distribution you need each year. The tax deduction potential of a traditional IRA depends on your income and whether your employer offers a retirement plan.
• Roth Ira You can use your post-tax money to save for retirement. In other words, you cannot enjoy tax cuts for your contributions. However, upon retirement, defined as the age of 59 or older, you may extend your tax-free money before withdrawing. Unlike traditional IRAs, you are not forced to get a minimum withdrawal. You can also pass the money to your tax-free heirs. The Roth IRA has an income limit, so even if you do too much you may not be able to take advantage of it.

These are some of the biggest differences between the two main types of IRAs, but you’ll want to understand some of the other fine points of each IRA before deciding which one is right for you.

What are the advantages and disadvantages of an IRA?

The most important advantages and disadvantages of an IRA are:

What is 401(k)?

The 401(k) plan is an employer-sponsored retirement plan that allows corporate workers to save for retirement on a tax basis. In 401(k), money can grow taxable or tax-free until withdrawn upon retirement. Employees can deduct a portion of their salary from their pay and invest in potentially high-revenue assets such as stock mutual funds.

The annual contribution limit for 401(k) is $23,500 in 2025, and this figure usually rises every few years. These ages 50 and above can make a catch-up contribution of $7,500 each year. Starting in 2025, people aged 60 to 63 can compensate for up to $10,000 in catch-up contributions per year.

You can only open a 401(k) plan if it is provided by your employer. This plan offers a set of fixed investments you can invest in, and often the investments you may invest in. These funds typically invest in a combination of the two, such as stocks, bonds, or target dates.

Many 401(k) have a plan to “match” some of the employee’s contributions to the account and offer “free money.” It is possible to earn 3-5% (and sometimes more) of your salary.

Types of 401(k) Plans

There are two main types of employer-sponsored 401(k) plans, and the key difference is the type of tax advantage they offer.

• Traditional 401 (k) Employees can save on retirement on a pre-tax basis. This means you will not pay taxes on your contributions. Money in your account can increase tax deferral until withdrawn at retirement, defined as starting at age 59½. If you withdraw at retirement, your funds will be taxed at your normal income rate. After age 73, you must obtain the minimum distribution required each year. Importantly, traditional 401(k) is always tax deductible regardless of your income.
• Loss 401 (k) Employees should use their post-tax money to save for retirement. This means that you will pay tax on any donation. However, money in your account will grow tax-free and may be withdrawn at retirement, defined as the age of 59 or older. Roth 401(k) does not require a minimum distribution. Typically, a Loss 401(k) is lotted into a Loss IRA with little or no tax impact (no unnecessary distribution).

These are the biggest differences between the two types of 401(k) plans, but one employer’s plan may differ from the other employer’s plans, so it’s important to read the detailed print of the plan and see what you don’t allow.

Employee contributions to 401(k)

Employee contributions to the 401(k) plan are limited to $23,500 in 2025. Employees are seamlessly deducted from their pay and deposited into their accounts, allowing employees to join the plan and feel as if they are missing out on their money.

If they choose to purchase mutual funds as part of their plan according to their investment plan, the funds will be automatically invested in those funds.

Employers matching contributions to 401(k)

Many employers provide a congruent contribution to some or all of the employee’s 401(k) contributions and encourage employees to participate in the planning.

For example, some employers may compare 50% of employee contributions to up to 8% of their salary each year. If an employee contributes 8%, the employer adds an additional 4%, and the employee effectively enjoys a total of 12% savings. However, if an employee contributes 10%, the employer still adds up to 4%.

Employers may offer different amounts of matching, and some employers may not offer matches at all.

A matching contribution can be treated as a traditional 401(k) or Roth 401(k) deposit, regardless of the type of account the employee contributes to, due to secure law 2.0. However, matching funds treated as Roth 401(k) contributions are taxable.

Many employers need contributions that match vesting over time. For example, if an employer requires a three-year vesting, employees must remain in the company for at least three years before the matching funds become fully theirs. However, once employees exceed the vesting period, subsequent matching funds will soon become theirs.

Matching funds can be partially bested depending on the length of service of their employees. For example, a three-year vesting schedule may allow employees staying for two years to maintain two-thirds of their matching funds. However, rules depend on the details of the employer’s plan.

What are the advantages and disadvantages of the 401(k)?

In summary, there are many advantages and disadvantages of a 401(k) plan. This is most important:

Is it better to have a 401(k) or an IRA?

There are so many similarities, which should investors choose? Now, if you can make the most of your contribution to both, you don’t have to choose, enjoying the full benefits each offers. But while that is allowed, many cannot afford to do so.

Many experts consider the 401(k) to be a clear, great option.

“In reality, we don’t compare our IRA to a 401(k),” says Joseph Audi, wealth advisor at Steel Peak Wealth Management in Beverly Hills, California. “If you’re not using the 401(k), you’re missing it.”

However, the financial advisors emphasize that both plans are valuable to your retirement plan.

“We’re looking forward to seeing you in the process of doing things,” said Michael Burke, CFP at Lido Advisors in Southbury, Connecticut.

In any case, experts recommend making the most of the matched funds in your 401(k) plan, as it’s free money. If you want to contribute to an IRA after that – the Ross IRA is a popular option – it’s up to you.

Other important differences between the 401(k) and the IRA

However, it is worth pointing out some important differences between the two.

• An IRA is easy to obtain. If you earn income in a particular year, you can contribute to your IRA. (And even the worker’s spouse can set up one without earning an income.) They can be set up at many financial institutions, such as banks and online brokerage companies. Also, opening an IRA online allows you to do it in under 15 minutes with most brokers. In contrast, to get a 401(k), you need to work for the company that offers.
• 401(k) plans may offer employer matches. While it may be difficult to get them, the 401(k) plan has the potential for free money. This means that many employers will match your contributions to some extent. With an IRA, you are alone.
• IRAs offer better investment choices. If you need the best possible investment, an IRA offers most options, especially at online brokerages. There is a complete suite of assets offered by the institution, including stocks, bonds, CDs, mutual funds, ETFs and more. With a 401(k) plan, you only have the options available for that particular plan. Often, it’s just a few dozen mutual funds.
• The Roth IRA and Roth 401(k) do not have the minimum distribution required. The traditional 401(k) and traditional IRAs required a minimum distribution from the age of 73. In contrast, both the Roth IRA and the Roth 401(k) can avoid the required distribution.
• An IRA requires investment knowledge. The backstage of having many investment options in an IRA is that you need to know what to invest and many participants are not in that position (although Robo-Advisors can help here). Even with more limited investment choices, the 401(k) could provide better options for workers. Typically, investment options are decent if not the best, and 401(k) plans may also provide advice and coaching.
• 401(k) offers a higher contribution limit. 401(k) is objectively superior. With employer-sponsored plans, you can add much more to your retirement savings than your IRA in 2025 compared to $7,000. Additionally, if you’re over 50, the 401(k) will have a larger catch-up contribution, earning $7,500 compared to your IRA’s $1,000.
• Contributions to the traditional 401(k) are always tax deductible. Contributions to the traditional 401(k) are always tax deductible regardless of income. In contrast, traditional IRA contributions may or may not be tax-deductible depending on income and whether they are already covered in a 401(k) plan at work.
• It’s easier to set up losses with an IRA. Both the 401(k) and the IRA have a loss version, allowing money to grow and tax-free withdrawal upon retirement. Not all employers offer a Roth 401(k), but anyone who qualifies for a Roth IRA can open it. Even if you make money, you may be able to open a backdoor loss IRA.
• You can get a loan with a 401 (k). Generally, getting cash from an IRA or 401(k) can result in taxes and fines. However, a 401(k) may be able to take away the loan depending on how the employer’s plan is structured. Just like with a regular loan, you will need to pay interest, and usually have a repayment period of less than five years. However, rules vary from plan to plan, so please check the details of your plan.
• A 401(k) is safer from creditors. A 401(k) is safer from creditors than an IRA, for example in bankruptcy or in adverse lawsuits.

Conclusion

“The best individual retirement plans often include both a 401(k) and an IRA,” Burke says. “Understanding the differences between the two allows individuals to make better informed decisions and get the most value from their investment options.”

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. Furthermore, investors recommend that past investment products performance is not a guarantee of future price increases.