Planning for retirement doesn’t have to be overwhelming. We’ll walk you through the differences between 401(k)s and IRAs (individual retirement accounts).
What’s the Difference Between an IRA and 401(k)?
These days, few people have access to “defined benefit” plans like the pensions that may have guaranteed your grandparents a certain payout from retirement through the rest of their lives.
Instead, most retirement plans are of the “defined contribution” variety, meaning you (and maybe your employer) contribute a certain amount each month, quarter, or year, with the payout you receive during retirement based on the market value of the account.
IRAs and 401(k)s are among the most common defined contribution plans, and both offer tax-advantaged retirement savings. However, there are a few key differences between these types of plans.
The good news is that you don’t have to choose one over the other. For the health of your retirement, you can — and should, if possible — contribute to both a 401(k) and an IRA.
What’s a 401(k)?
A 401(k), as well as a 403(b) and 457, is a qualified employer-sponsored retirement plan. If your employer does not offer a 401(k) or other sponsored plan, you should probably just begin saving in a Roth IRA or traditional IRA. But if you have access to an employer plan — especially if the employer offers matching contributions — that’s the best place to start.
Many employers offer a matching contribution up to a certain percentage of your salary. For instance, if your employer will match your 401(k) contributions up to 6% of your salary, you should always contribute at least 6%. If not, you’re turning down free money.
The money you contribute to your 401(k) account is pretax money, meaning you will not be taxed on that money during the year you earned it. You will pay taxes on it when you withdraw it during retirement. During 2026, employees are allowed to contribute up to $24,500 and those over 50 can make an additional catch-up contribution of $8,000. A higher catch-up contribution limit of $11,250 is available for employees aged 60, 61, 62 and 63.
What’s an IRA?
While the opportunity to contribute to a 401(k) is for the most part limited to people employed by companies that offer such plans, anyone can contribute to a traditional IRA.
Like a 401(k), a traditional IRA offers tax-deferred growth on your investments, meaning the assets in the IRA will not be taxed until they are withdrawn. A traditional IRA may also offer tax-deductible contributions for people who don’t participate in an employer-sponsored plan.
A Roth IRA offers opposite tax advantages from a traditional IRA: You pay tax on income before you make contributions to the Roth IRA, but you’ll pay no tax on withdrawals of either your earnings or contributions when you make withdrawals in retirement. However, not everyone qualifies for a Roth IRA. To qualify in 2026, you’ll have to have an adjusted gross income that is less than $153,000 or $242,000 for married couples filing jointly.
For 2026, the maximum annual IRA contribution is $7,500 for individuals under age 50, or $8,600 for those 50 and older. For 2025, limits are $7,000 and $8,000 if over 50. Note, you have until the day your taxes are due (April 15, 2026) to set up and fund your Roth and/or traditional IRA for the previous year.
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