What distinguishes a 401(k) from an IRA?

Retirement planning shouldn't feel daunting. Let's explore the contrasts between 401(k)s and IRAs (individual retirement accounts).

Key Differences Between IRAs and 401(k)s

Currently, many individuals lack access to traditional “defined benefit” plans, such as pensions that once assured retirees regular payouts for their lifetimes.

Instead, most retirement options are “defined contribution” plans, where you and possibly your employer contribute a defined sum periodically, and the retirement payout depends on the account's market value.

Both IRAs and 401(k)s are prevalent defined contribution options, providing tax benefits for retirement savings. Yet, they have notable differences.

The good news? You can contribute to both a 401(k) and an IRA, enhancing your retirement savings.

What Is a 401(k)?

A 401(k), along with options like 403(b) and 457, is an employer-sponsored retirement plan. If your workplace doesn’t provide a 401(k) or similar plan, consider starting a Roth IRA or traditional IRA. However, if you have access to an employer plan, particularly with matching contributions, that’s the ideal starting point.

Employers often match contributions up to a specific percentage of your salary. For example, if your employer matches up to 6% of your salary, it’s wise to contribute at least that amount to avoid missing out on free money.

Your 401(k) contributions are made with pretax dollars, meaning you won’t pay taxes on that money until you withdraw it during retirement. In 2026, employees can contribute up to $24,500, with an additional catch-up contribution of $8,000 for those over 50. Employees aged 60 to 63 can make a higher catch-up contribution of $11,250.

What Is an IRA?

Unlike a 401(k), anyone can contribute to a traditional IRA, regardless of employment.

A traditional IRA allows tax-deferred growth, meaning you won’t pay taxes on the investments until you withdraw them. It may also enable tax-deductible contributions for those not enrolled in an employer plan.

A Roth IRA provides different tax benefits: you pay taxes on your income before contributing, but withdrawals in retirement are tax-free. However, not everyone qualifies for a Roth IRA. For 2026, your adjusted gross income must be below $153,000 (or $242,000 for married couples filing jointly) to be eligible.

In 2026, the maximum contribution limits for IRAs are $7,500 for individuals under 50 and $8,600 for those 50 and older. For 2025, those limits are $7,000 and $8,000 for individuals over 50. Remember, you can set up and fund your Roth or traditional IRA until tax day (April 15, 2026) for the previous year.