401(k) vs IRA: Complete Retirement Account Comparison
Make informed decisions about retirement savings by understanding the key differences between 401(k) and IRA accounts, including contribution limits, tax benefits, and investment options.
Table of Contents
401(k) vs IRA Overview
Both 401(k) plans and Individual Retirement Accounts (IRAs) offer tax advantages for retirement savings, but they have different rules, limits, and benefits. Understanding these differences helps you maximize your retirement savings strategy.
Quick Comparison 2024
401(k) Plan
- • Contribution limit: $23,000 ($30,500 if 50+)
- • Employer-sponsored
- • Often includes employer matching
- • Limited investment options
- • Higher contribution limits
- • Loan options available
IRA (Traditional/Roth)
- • Contribution limit: $7,000 ($8,000 if 50+)
- • Individual account
- • No employer matching
- • Unlimited investment options
- • Lower contribution limits
- • More flexible access
Contribution Limits and Rules
Contribution limits are adjusted annually for inflation. Understanding these limits helps you plan your savings strategy and avoid penalties.
| Account Type | 2024 Limit (Under 50) | 2024 Limit (50+) | Total Possible |
|---|---|---|---|
| 401(k) | $23,000 | $30,500 | $69,000 (with employer) |
| Traditional IRA | $7,000 | $8,000 | $8,000 |
| Roth IRA | $7,000 | $8,000 | $8,000 |
Tax Treatment Comparison
The biggest difference between account types is how contributions and withdrawals are taxed:
Traditional 401(k) and Traditional IRA
- Contributions: Tax-deductible (reduces current taxable income)
- Growth: Tax-deferred (no taxes on gains until withdrawal)
- Withdrawals: Taxed as ordinary income in retirement
- RMDs: Required minimum distributions starting at age 73
Roth 401(k) and Roth IRA
- Contributions: Made with after-tax dollars (no immediate deduction)
- Growth: Tax-free forever
- Withdrawals: Tax-free in retirement (if rules followed)
- RMDs: Roth 401(k) requires RMDs; Roth IRA does not
Traditional vs Roth Decision
Choose Traditional If:
- • Currently in high tax bracket
- • Expect lower taxes in retirement
- • Want immediate tax deduction
- • Close to retirement
Choose Roth If:
- • Currently in low tax bracket
- • Expect higher taxes in retirement
- • Want tax-free growth
- • Young with long time horizon
Investment Options
The range of available investments varies significantly between 401(k) plans and IRAs:
401(k) Investment Options
- Limited to plan's menu (typically 10-30 options)
- Usually includes target-date funds, index funds, and actively managed funds
- May have higher expense ratios due to plan fees
- Some plans offer brokerage windows for broader options
IRA Investment Options
- Virtually unlimited: stocks, bonds, ETFs, mutual funds, REITs
- Can choose low-cost providers and funds
- Access to individual stocks and specialty investments
- Greater control over expense ratios and fees
Employer Matching Benefits
The biggest advantage of 401(k) plans is potential employer matching - essentially free money added to your retirement savings.
Common Matching Formulas
- 50% match up to 6%: Employer adds $0.50 for every $1 you contribute, up to 6% of salary
- 100% match up to 3%: Dollar-for-dollar match on first 3% of salary
- 100% up to 3%, 50% on next 2%: Full match on 3%, half match on next 2%
- Profit sharing: Additional contributions based on company performance
Always contribute enough to get the full employer match - it's an instant 100% return on investment!
Withdrawal Rules and Penalties
Understanding withdrawal rules helps you avoid costly penalties and plan for retirement income:
Early Withdrawal Penalties (Before Age 59½)
| Account | Penalty | Exceptions |
|---|---|---|
| 401(k) | 10% + income tax | Hardship, loans, age 55 rule |
| Traditional IRA | 10% + income tax | First home, education, medical |
| Roth IRA | Contributions: none Earnings: 10% + tax | 5-year rule, same as traditional |
Which Account to Choose
The optimal strategy often involves using multiple account types. Here's a recommended approach:
Optimal Savings Strategy
- Step 1: Contribute to 401(k) up to employer match (free money)
- Step 2: Max out IRA ($7,000) for better investment options
- Step 3: Return to 401(k) and max it out ($23,000 total)
- Step 4: Consider mega backdoor Roth if available
- Step 5: Taxable investment accounts for additional savings
This strategy maximizes matching dollars while optimizing investment flexibility and tax treatment.
Special Considerations
- Income Limits: Roth IRA contributions phase out at higher incomes
- Backdoor Roth: High earners can use backdoor conversion strategies
- Job Changes: 401(k) accounts can be rolled to IRAs for better control
- Required Distributions: Plan for RMDs starting at age 73
Both 401(k) plans and IRAs are valuable retirement savings tools. The best approach often involves using both types strategically to maximize employer benefits, optimize investment options, and create tax diversification for retirement income planning.
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Frequently Asked Questions
Should I contribute to 401(k) or IRA first?
Generally, contribute to 401(k) up to employer match first (free money), then max out IRA for better investment options, then return to 401(k) if you can save more.
Can I have both a 401(k) and IRA?
Yes, you can contribute to both. However, IRA deductibility may be limited if you have a workplace plan and earn above certain income thresholds.
What happens to my 401(k) when I leave my job?
You can leave it with your former employer, roll it to your new employer's plan, roll it to an IRA, or cash out (with penalties if under 59½).
About Jennifer Walsh
Financial expert and calculator specialist with over 10 years of experience helping people make smarter financial decisions. Specializes in mortgage, investment, and retirement planning.