Differences between IRA vs. 401(k) + which is right for you

An employer-sponsored 401(k) is most people’s first introduction to retirement accounts. Some employers use auto-enrollment, and the funds come directly from your paycheck, so it’s easy to get started. 

No one’s likely to hand you an IRA in the same way. So understandably, you might not know the difference between a 401(k) and an IRA – or which is right for you.

They’re both tax-advantaged retirement accounts, but your 401(k) is tied to your employer while your IRA is individually owned. Both are great options for your retirement and tax strategies, and you can choose both if you like. First, you need to understand the specific tax advantages, contribution process, and investment opportunities to create an effective retirement strategy. 

Don’t worry — we’ll walk you through everything you need to know to pick the right account based on your strategy. Learn more about IRAs vs. 401(k)s below and start building wealth today.

IRA vs. 401(k)

The biggest difference between these two is who owns the account – your employer (401(k)) or you (IRA). But there’s a lot more to know if you’re trying to build a retirement strategy that maximizes your tax advantages. 

Here’s an overview of 401(k)s and IRAs, as well as their Roth options:

401(k) overview

Many employers offer 401(k) accounts to help employees save for retirement. Self-employed folks can even open their own 401(k).Some employers use auto-enrollment, but you can determine how much you want to contribute from your paycheck each period.

401(k)s have excellent tax advantages, and you might have your choice of a traditional or Roth account. IRAs also offer Roth options, and the difference is simple:

• Traditional accounts take pre-tax contributions, so you reduce your taxable income and defer taxes until you withdraw in retirement.  
• Roth accounts accept after-tax funds that grow tax-free, so you don’t have to worry about your tax bill in retirement. 

If possible, we recommend prioritizing 401(k) contributions for a single amazing benefit: employer-match contributions. This is the biggest benefit a 401(k) has over an IRA, but there are plenty of other perks to know: 

• Tax treatment: Traditional 401(k)s are tax-deferred, and Roth accounts grow tax-free.
• Contribution limit: 401(k) contributions max out at $23,000 in 2024, plus a $7,500 catch-up contribution for those age 50 or older. 
• Withdrawals: Penalty-free withdrawals at 59½ or earlier if you meet the Rule of 55 requirements.
• 401(k) loans: You can take loans as large as $50,000 or 50% of your assets, whichever is less, against your 401(k) balance and repay it with interest.
• Investment options: Choice of investments limited to employer-provided selection.

IRA overview

IRAs are independently owned retirement accounts, which means you own and can contribute to the account for as long as you keep it open. Anyone can open an IRA as long as they have earned income to contribute. 

Like with 401(k)s, you can choose between a traditional and a Roth account. However, Roth IRAs have income limits. Eligibility phases out in these income ranges, meaning you can still make contributions if your salary is below the lower end of the range, but you lose the ability to contribute if it exceeds the top range:

• Single filers and heads of household: $146,000-$161,000
• Married couples filing jointly: $230,000-$240,000
• Married filing separately with a workplace retirement plan: $0-$10,000

That’s a bit of a bummer if you don’t qualify, but Roth accounts are generally best for folks who are making less now than they expect to in the future, anyway. 

Roth IRAs have one other cool advantage over 401(k)s – you can withdraw money from your contributions at any time without triggering income taxes or early withdrawal penalties. However, you can't borrow money from an IRA like you can some 401(k)s.

Here’s a snapshot of IRAs:

• Tax treatment: Traditional IRAs are tax-deferred, and Roth accounts are tax-free.
• Contribution limit: Max contributions at $7,000 in 2024, plus a $1,000 catch-up contribution if you’re age 50 or older. 
• Withdrawals: Penalty-free withdrawals at 59½, though you can withdraw contributions from your Roth IRA at any time.
• Account types: IRAs also have SEP and SIMPLE account options, which allow business owners to set up IRAs for themselves and employees.. 
• Investment options: Increased opportunities to hand-select your specific investments.

How to choose between a 401(k) and IRA

Spoiler: You can have both a 401(k) and IRA, if you want. Our recommended approach is to contribute enough to your 401(k) to get your employer match, then start investing in your IRA or continue 401(k) contributions as you see fit. 

The best contribution strategy for you depends on your retirement goals, career trajectory, and interest in managing investments. You can review some scenarios below to figure out what works or connect with a financial advisor for help. 

Want a custom roadmap to maximize your tax advantages? Try Playbook to see where you should invest and in what order according to your goals.

1. Do you receive employer-match contributions?

If an employer offers 401(k) matching, your first goal is to max those benefits. So if you make $100,000 a year and your employer matches 50% of your contributions up to 5% of your income, you should contribute $10,000 to get the full $5,000 employer match.

It’s essentially free money that’s part of your compensation, so why wouldn’t you take all that you can get? 

If you don’t have any employer-match benefits, a 401(k) is still valuable, but it’s not necessarily your priority. It’s also worth noting that high earners won’t earn employee matching on any income over the $345,000 compensation limit.

2. Are you a high earner?

If you’re rolling in the dough and only expect your income to grow, a 401(k) offers a higher contribution limit so you can stash away more cash each year. 

That doesn’t mean you have to max your $23,000 contribution limit each year. You’ll likely benefit from diversifying your retirement accounts  by adding an IRA to the mix. 

Start by earning all of your employer-matching contributions, then decide if a Roth or traditional IRA makes sense. 

• Get an IRA if: You enjoy managing your investments and want more options, or you already maxed your 401(k) and want to continue making contributions.
• Skip the IRA if: You make too much to contribute to a Roth and you’re ineligible for IRA tax deductions. 

3. Do you enjoy investing and know how to manage multiple accounts?

IRAs typically have a wider range of investment options to choose from. So, if you’re a savvy, hands-on investor, consider opening an IRA so that you’re not limited to a select menu of investments chosen by your employer.

This provides a little more flexibility, but managing multiple accounts can get tricky. Consider whether you have the bandwidth to keep track of them all. You can always consult a broker or robo-advisor to help. 

Additional accounts might also increase your exposure to administrative and investment fees, which can be more expensive with IRAs than 401(k)s. So compare brokers before you open an account. 

4. How long are you staying at your job?

Are you staying with your employer for the long-run or looking to jump ship? A 401(k) is tied to your employer, so you’ll have to transfer the account when you leave. 

If you like your job and plan to stick around, a 401(k) is great!

But if you’re still figuring out your career path, consider an IRA to keep things simple or contribute to both so you separate your nest eggs into different baskets. 

Playbook tip: Some employers enforce vesting rules, which can prevent you from keeping your employer match until you’ve been with the company for a certain period. If you’re in this position and don’t know that you’ll be fully vested before leaving, opt for an IRA. 

5. Are you unemployed, self-employed, or otherwise not eligible for a 401(k)?

Some employers offer 401(k) plans as part of an employee benefit package. If your employer doesn’t offer a 401(k), you’re a part-timer, or you’re unemployed, you might not have access to a 401(k), so an IRA is an easy choice. 

If you get access to an employer-provided 401(k) later on, you can choose to rollover your IRA into the 401(k) or keep the accounts separate. There are a few benefits to a reverse rollover like this, but it’s ultimately up to you. Contributing to both accounts is also a good idea if you have the funds to split contributions. 

If you’re self-employed, you can open a solo 401(k) with a 401(k) plan provider. This is a great way to increase your retirement contributions since IRA contributions max out at $8,000 with catch-up contributions. 

The Playbook take: Boost your tax strategy with both a 401(k) and IRA

Both a 401(k) and IRA are tax-advantaged accounts that will support your retirement strategy. Your best bet depends on how much you have to contribute, whether you receive employer matches, and what your financial goals are. 

Generally, both a 401(k) and IRA are great. The biggest difference is that you and you alone own your IRA, while your 401(k) has some employed involvement with investment options and matching contributions.

Want help finding the perfect mix? Playbook can help you prioritize your investments and outsmart taxes so you have more money for your future.