While both a 401(k) and individual retirement account (IRA) are designed to help you save for retirement, they operate under different rules and offer distinct advantages. Understanding these differences is crucial for building a robust retirement strategy, and you may even find that contributing to both is a beneficial approach for you.
This article shares the key distinctions between a 401(k) plan and an IRA, helping you understand their core features and how they can fit into your overall financial plan.
Please note that this comparison does not cover specialized plans, like Starter 401(k) accounts, SEP IRAs, or SIMPLE IRAs.
Feature | Standard 401(k) | IRA |
Eligibility | Any employee who meets the eligibility requirements of their employer-sponsored plan and has eligible compensation. | Open to anyone meeting the IRS income requirements. |
Contribution types |
| Guideline IRAs allow for traditional and Roth contributions.
Income limitations may impact the ability to deduct traditional contributions or make Roth contributions. |
Who contributes | You and possibly your employer, if the plan offers an employer match or profit sharing contribution. (Employer contributions are generally made as pre-tax contributions.) | Only you can make contributions. |
Tax treatments | Pre-tax: Contributions are tax-deferred and not included in taxable income for that tax year.
Roth: Contributions are included in taxable income in the year they are made. | Traditional: Contributions are generally tax deductible and not included as taxable income.
Roth: Contributions are included in taxable income at the time they are made. |
Contribution methods | Employee deferral contributions are deducted directly from payroll.
For a sole proprietor or partner, contributions are generally made through owner contributions. | Contributions are deducted from a connected savings or checking account. |
Contribution limits | Higher contribution limits than IRAs.
401(k) limits are combined across pre-tax, Roth, and certain other plans.
See the current year contributions limits here. | Lower limits than 401(k) accounts.
IRA limits are combined across Roth and traditional contributions.
See the current year contributions limits here. |
Catch-up contributions | Catch-up contributions permitted and vary based on age, starting at age 50 or older in the current tax year. | Catch-up contributions permitted starting at age 50 or older in the current tax year. |
Income limitations | No applicable income limitations. | There are income requirements to (1) deduct the traditional IRA contribution or (2) make a Roth IRA contribution. |
Taxes on earnings | Regardless of contribution type, earnings are not taxed while they remain in the plan. | Regardless of contribution type, earnings are not taxes until they are distributed from the account. |
Taxation on distributions | Pre-tax elective deferrals: Distribution amount is taxed as ordinary income.
Roth elective deferrals: Distribution of elective deferral contributions (basis) are always tax free. The earnings on the basis are also tax free if the distribution meets the requirements for a qualified distribution.
| Traditional: The amount is taxed as ordinary income. Exception: Nondeductible contributions made to a traditional IRA are not taxable (tracked by account owner on IRS Form 8606). The earnings accumulated on the nondeductible contributions are taxable.
Roth: Distribution of Roth contributions (basis) are always tax free. The earnings on the basis are also tax free if the distribution meets the requirements for a qualified distribution. |
Withdrawal penalties | Generally, yes. A 10% early withdrawal penalty tax applies if withdrawn before reaching age 59 ½ unless an early withdrawal penalty tax exception applies. The penalty tax will apply to the taxable portion of the distribution. | Generally, yes. A 10% early withdrawal penalty tax applies if withdrawn before reaching age 59 ½ unless an early withdrawal penalty tax exception applies. The penalty tax will apply to the taxable portion of the distribution. |
Account protection | Generally, your full account balance is protected from creditors as long as it stays in the plan.
Exceptions are: 1) a qualified domestic relations order (QDRO); 2) Federal tax liens for unpaid federal income taxes; 3) Federal criminal penalties or fines; 4) judgements in criminal wrongdoing against the plan.
In addition, for plans not covered by ERISA, state law will determine if the account is subject to creditors. However, if you declare bankruptcy, non-ERISA plan assets will be protected under federal law up to $1,711,975 (as of 4/1/2025). | Since IRAs are not qualified retirement plans under the IRS code, state law will determine if the account is subject to creditors and can vary significantly between states.
Federal law protects IRA assets in the event of an account owner declaring bankruptcy up to $1,711,975 (as of 4/1/2025).
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Withdrawal rules | While employed: Generally, a participant can request a distribution from a plan at Guideline upon reaching age 59 ½ or if a participant incurs a hardship.
Upon severance of employment: You may request a distribution of your full account balance from a Guideline plan at any time after leaving employment.
However, if a distribution is taken before reaching age 59 ½, a 10% early withdrawal penalty tax may apply to the taxable portion of the distributed amount.
See the full list of penalty exceptions. | IRA contributions are distributable at any time. However, if you request a distribution before reaching age 59 ½, a 10% early withdrawal penalty tax may apply to the taxable portion of the distributed amount.
See the full list of penalty exceptions.
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Visit the IRS site to learn more about 401(k) accounts, Roth accounts, and IRAs.
This article is for informational purposes only and not intended to be construed as investment or tax advice. For more information, consult with a qualified tax or financial advisor.