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IRA vs. 401(k): What’s the difference?

IRAs and 401(k)s are two types of retirement accounts, but they aren't interchangeable.

Both individual retirement accounts (IRAs) and 401(k)s are types of tax-advantaged investment accounts individuals use to save for retirement. But they aren’t interchangeable. Find out the differences between these two valuable retirement accounts and the advantages and disadvantages of each.

IRA vs. 401(k) at a glance

  • IRAs and 401(k)s are two types of tax-advantaged retirement accounts, but individuals open IRAs, whereas employers offer 401(k)s.
  • The 2023 IRA contribution limit is $6,500, and the 401(k) contribution limit is $22,500.
  • IRAs let you invest in most assets, while 401(k)s are limited mostly to mutual funds.

IRA vs. 401(k): What’s the difference?

IRAs and 401(k)s are the two main types of retirement accounts in the US. More than 60 million active participants and former employees and retirees held a 401(k) as of September 2022, according to the Investment Company Institute (ICI). Meanwhile, more than four in 10 US households owned an IRA.

Both types of accounts are tax-advantaged, meaning they offer tax benefits for setting aside money for retirement. The main difference between these two types of retirement accounts are:

  • Employers offer 401(k)s, whereas individuals open IRAs on their own.
  • IRAs offer a greater selection of investments than most 401(k)s.
  • Savers can’t contribute nearly as much to an IRA as they can to a 401(k). The IRA contribution limit for 2023 is $6,500 ($7,500 if you’re age 50 or older), while 401(k) contributions top out at $22,500 ($30,000 if you’re age 50 or older).
401(k)Roth IRATraditional IRA
Who it’s forYou want to take advantage of employer-matching contributions

You want to pay taxes on a smaller portion of your salary since your contributions lower your taxable income

You want to invest passively through automatic elective-deferral contributions

You’ve maxed out your IRA

You’re under the income limit threshold to save in a Roth IRA

You think you’ll be in a higher income tax bracket in retirement

You don’t want mandatory withdrawals at age 72

You earn more today and think you’ll be in a lower tax bracket in retirement

You make too much money for a Roth IRA

You want an immediate tax break

Max contribution per year$22,500 ($30,000 if you’re age 50 or older)$6,500 ($7,500 if you’re age 50 or older)$6,500 ($7,500 if you’re age 50 or older)
Are contributions tax-deductible?No, you can’t take a deduction on your tax return, but your contributions automatically lower your taxable incomeNoYes

What is an IRA?

An IRA is a tax-advantaged investment account individuals can use to save for retirement. Congress created the IRA in 1974 to provide workers without an employer-sponsored retirement plan with a means to set aside money for retirement.

Unlike the 401(k), individuals open IRAs on their own. They come in several types, but the two most common are the traditional IRA and Roth IRA. Most major banks and brokerages offer these retirement accounts, and anyone with earned income can open one.

Compared to a 401(k), IRAs let you invest in most assets. These include:

Through a self-directed IRA, which offers even greater flexibility in terms of permitted investments, you can invest your retirement funds in alternative assets. Examples of alternative assets include real estate, cryptocurrencies and commodities like physical gold.

Types of IRAs

IRAs come in two main types: traditional and Roth. Other types of IRAs include SEP and SIMPLE IRAs, though these are facilitated by business owners.

You can have a traditional IRA, a Roth IRA, or both, but your total contributions across both are capped at $6,500 in 2023.

Traditional IRA

Traditional IRAs are funded with pre-tax dollars, and contributions to this type of account are typically tax-deductible. The amount you can deduct depends on whether you or your spouse participates in a retirement plan at work. Come retirement, you pay taxes on both your contributions and the earnings on your investments.

Traditional IRAs have no income limits, but, like traditional 401(k)s, they do have RMDs. You’re required to begin taking distributions from your IRA when you reach age 72 (73 if you reach age 72 after December 31, 2022).

Roth IRA

Contributions made to a Roth IRA are made with after-tax dollars, and contributions to this type of account are not tax-deductible.

However, since you already paid taxes on the money, you can withdraw your contributions at any time without taxes or penalties. And when you take qualified distributions of earnings from your Roth IRA, you do not have to pay taxes on the withdrawals. Aside from certain exceptions, a distribution is considered qualified when you reach the age of 59 and a half and have held your Roth IRA for at least five years.

Roth IRAs do not have RMDs, so you’re not required to make withdrawals at any point.

IRA contribution limits

In 2023, you can contribute up to $6,500 ($7,500 if you’re 50 or older) total across both your traditional and Roth IRAs.

While traditional IRAs have no income limits, you’re limited to how much you can contribute (or if you can contribute at all) to a Roth IRA based on your modified adjusted gross income. For example, married couples filing jointly with a MAGI above $218,000 can’t contribute anything to a Roth IRA.

IRA pros and cons

Pros
  • Traditional IRA contributions are tax-deductible
  • Qualified Roth IRA withdrawals are tax-free
  • Anyone with earned income can contribute to an IRA
  • Wide range of investment options
Cons
  • Roth IRAs have income limits
  • Relatively low contribution limits
  • Early withdrawal penalties apply
  • Required minimum distributions for traditional IRAs when you reach 72

Compare brokers that offer retirement accounts

Narrow down top brokers by annual fee, stock trade fee and more to find the best for your budget and financial goals.

1 - 3 of 7
Name Product Minimum deposit Annual fee Retirement account types
SoFi IRA
Finder Score: 4.2 / 5: ★★★★★
SoFi IRA
$0
$0 per month
Roth, Traditional, SEP, Rollover
Trade stocks, options, ETFs, mutual funds and alternative asset funds, with no-cost financial advice and a no-cost robo-advisor.
Tastytrade IRA
Finder Score: 4.3 / 5: ★★★★★
Tastytrade IRA
$0
$0 per year
Roth, Traditional, SEP, Rollover, Beneficiary Traditional, Beneficiary Roth
Invest in stocks, ETFs, options, futures and more in your IRA, with commission-free stock and ETF trades and a powerful trading platform.
JP Morgan Personal Advisors
Finder Score: 3.3 / 5: ★★★★★
JP Morgan Personal Advisors
$25,000
0.6% on balances of $25,000 to $249,999

0.5% on balances of $250,000+
Roth, Traditional
Ongoing access to an advisory team with personalized, expert-built portfolios. Provider terms & conditions apply
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Finder is not an advisor or brokerage service. Information on this page is for educational purposes only and not a recommendation to invest with any one company, trade specific stocks or fund specific investments. All editorial opinions are our own.

What is a 401(k)?

A 401(k) is a retirement plan employers offer that qualifies for tax breaks under the Internal Revenue Code (IRC).

Employees contribute to a 401(k) via elective deferral, meaning a percentage of their salary is withheld and contributed to the account each pay period. Employers can also contribute to employees’ accounts. According to the Investment Company Institute, ninety-one percent of 401(k) plan participants are in plans with employer contributions. Employees then direct the money in their account into various available investments, most of which are mutual funds.

There are two types of 401(k) accounts: traditional 401(k)s and Roth 401(k)s. It’s possible to split your contributions between both, but the maximum you can contribute is $22,500 for 2023 ($30,000 if you’re age 50 or older).

Types of 401(k)s

The two most common types of 401(k)s are traditional and Roth 401(k)s. However, there are also safe harbor 401(k)s, SIMPLE 401(k)s and solo 401(k)s.

Here’s more on the two most common types.

Traditional 401(k)

Traditional 401(k) contributions are made using pre-tax dollars. While you don’t claim a tax deduction for your 401(k) contributions when you file your taxes, your contributions reduce your overall tax liability at the end of the year.

Your contributions and any earnings from your investments are tax-deferred. That means you pay taxes on contributions and earnings when you withdraw money at retirement. You can begin withdrawing money from your 401(k) without penalty once you reach age 59 and a half. Distributions before the age of 59 and a half will incur a 10% early-withdrawal penalty.

Traditional 401(k)s also have required minimum distributions (RMDs). With a traditional 401(k), you are required to start taking distributions when you reach the age of 72. The SECURE 2.0 Act, signed into law in late-2022, raised this age to 73 if you reach age 72 after December 31, 2022.

Roth 401(k)

A Roth 401(k) is similar to a traditional 401(k), but employee contributions are not tax-deferred. They’re made with after-tax dollars — money you’ve already paid taxes on. Because of this, you can withdraw contributions at any time, tax- and penalty-free. Meanwhile, you can withdraw the earnings you’ve made on your investments tax-free after the age of 59 and a half.

Unlike employee contributions to a Roth 401(k), employer matching contributions are made with pre-tax money and are held in a traditional 401(k).

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Employee contributions

Employees can contribute up to $22,500 ($30,000 if you’re age 50 or older) per year to their 401(k)s. Employee contributions to a traditional 401(k) are made with pre-tax dollars, while contributions to Roth 401(k)s are made with post-tax funds.

Employer matching contributions

Many employers offer matching contributions for their employees’ 401(k)s. These are often dollar-for-dollar matches up to a certain percentage of your salary. For example, your employer may match 100% of your contributions up to, say, 3% of your salary. If you make $50,000 per year and contribute $1,500 (3% of $50,000) to your 401(k), your employer would also contribute $1,500 on your behalf.

The 401(k) contribution limit is $66,000 for combined employee and employer contributions.

401(k) withdrawals

Qualified distributions from a 401(k) are allowed after you reach the age of 59 and a half. Distributions from a traditional 401(k) will be subject to federal income tax, while Roth 401(k) distributions will be tax-free, provided you’ve held the Roth 401(k) for at least five years.

If you take a distribution from either 401(k) type before you’re 59 and a half years old, you’ll have to pay an additional 10% penalty. There are some exceptions to this rule, including if you become totally and permanently disabled or if you need the money to prevent eviction. If you withdraw funds from a Roth 401(k) before the age of 59 and a half and before you’ve held the account for at least five years, you’ll have to pay both income taxes and the 10% early-withdrawal penalty.

401(k) pros and cons

Pros
  • Many employers offer matching contributions
  • Relatively high annual contribution limit
  • Tax benefits
  • Elective deferrals offer a great way to passively invest
Cons
  • Your employer may not offer a 401(k)
  • Limited investment options
  • Must pay expense ratios and potentially other fees with most mutual funds
  • Early withdrawal penalties apply

Frequently asked questions about 401(k)s vs. IRAs

Written by

Frank Corva

Frank Corva is business-to-business (B2B) correspondent for Bitcoin Magazine and formerly the cryptocurrency writer and analyst for digital assets at Finder. Frank has turned his hobby of studying and writing about crypto into a career with a mission of educating the world about this burgeoning sector of finance. He worked in Ghana and Venezuela before earning a degree in applied linguistics at Teachers College, Columbia University. He also taught writing and entertainment business courses in Japan and worked with UNICEF in Namibia before returning to the US to teach at universities in New York City. Earlier in his career, he spent years working as a publicist and graphic designer for record labels like Warner Music Group and Triple Crown Records. During that time, he was also a music journalist whose writing and photography was in published in Alternative Press, Spin and other outlets. See full profile

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