401(k) vs. IRA: The Basics
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401(k)s and IRAs are the two most common tax-advantaged retirement accounts in the U.S. They're not mutually exclusive — many people use both — but they work differently.
401(k)
A 401(k) is an employer-sponsored retirement plan. Contributions are typically deducted directly from your paycheck, and many employers offer a matching contribution up to a certain percentage of your pay — often described as "free money" because it's compensation you don't receive unless you contribute enough to claim the full match. Annual contribution limits are set by the IRS and adjusted periodically for inflation; the current limits for any given tax year are published at irs.gov and should be checked there directly, since they change from year to year.
IRA (Individual Retirement Account)
An IRA is an account you open yourself, independent of an employer, through a brokerage or bank. The two most common types are:
- Traditional IRA: contributions may be tax-deductible depending on your income and whether you're also covered by a workplace plan; withdrawals in retirement are taxed as income.
- Roth IRA: contributions are made with after-tax dollars, but qualified withdrawals in retirement — including investment growth — are tax-free.
IRA contribution limits are also set and adjusted by the IRS; current limits are published at irs.gov and are generally lower than 401(k) limits.
Using both together
A common strategy is to contribute enough to a 401(k) to capture the full employer match first (since that match is effectively an immediate, guaranteed return), then contribute to an IRA for additional tax-advantaged savings or investment options a 401(k) plan may not offer.
Use the retirement calculator on this site to model how combined contributions from a 401(k) and IRA could grow over time.
This article is for general education only and is not individualized financial, tax, or legal advice. Contribution limits and tax rules change; verify current figures at irs.gov and consult a qualified professional for guidance specific to your situation.