401(k) vs IRA

The short version

A 401(k) is a retirement plan your employer sets up. An IRA (individual retirement arrangement) is an account you open yourself at a bank or brokerage. Both give you a tax break for saving for retirement, and many people use both. The 401(k) usually allows much larger contributions and may come with an employer match. The IRA usually gives you a wider choice of investments.

This page covers U.S. federal rules only. If you live in Canada, the closest equivalents are the RRSP and TFSA.

What a 401(k) is

A 401(k) is an employer-sponsored plan. You choose a percentage of your pay, and your employer sends it straight into the plan before you see it. The IRS calls these elective deferrals. In a traditional 401(k), the money goes in before income tax, grows without yearly tax, and is taxed as income when you take it out. Many plans also offer a Roth 401(k) option, where you contribute after-tax money and qualified withdrawals later come out tax-free.

Some employers add money of their own, usually a match on part of what you contribute. Matching rules differ from plan to plan, and employer money may vest over a few years, so check your plan's summary description.

The investment menu is chosen by the plan. It is often a short list of mutual funds, target-date funds and sometimes index funds. You cannot usually buy any stock or ETF you like inside a 401(k).

What an IRA is

An IRA is an account you open on your own. You can contribute if you, or your spouse if you file jointly, have taxable compensation. There are two main kinds:

• Traditional IRA: contributions may be tax-deductible. The deduction can be limited if you or your spouse are covered by a retirement plan at work and your income is above certain levels. Withdrawals of deductible contributions and earnings are taxed as income.
• Roth IRA: contributions are not deductible, but qualified withdrawals are tax-free. Whether you can contribute directly depends on your filing status and modified adjusted gross income.

Because you pick the provider, an IRA can usually hold a wide range of stocks, bonds, ETFs and mutual funds. See Roth vs traditional IRA for how the two types compare.

2026 contribution limits (from IRS.gov)

Figures checked on IRS.gov on October 14, 2026. Your plan can set a lower limit, and the IRS adjusts these amounts for inflation, so check the IRS pages listed under Sources before you contribute.

The two sets of limits are separate. Contributing to a 401(k) does not reduce how much you can put in an IRA, although being covered by a workplace plan can affect whether your traditional IRA contribution is deductible.

Going over the IRA limit has a cost. The IRS charges a 6% tax each year on excess contributions that stay in the account, unless you take the excess and its earnings out by your tax filing deadline.

Side by side

Taking money out early

Both accounts are built for retirement. Money taken out before age 59½ is generally an early distribution, and on top of normal income tax the IRS adds a 10% additional tax unless an exception applies. The exceptions are not identical for the two accounts:

• Up to $10,000 for a qualified first-time home purchase, and qualified higher education expenses, are exceptions for IRAs but not for 401(k) plans.
• Leaving your job during or after the year you turn 55 is an exception for 401(k) plans but not for IRAs.
• Both share exceptions for things like disability, certain medical expenses and a series of substantially equal payments.

The full list is on the IRS early distribution page. When you leave a job, you can usually roll your 401(k) into an IRA or a new employer's plan. A direct rollover avoids the early distribution tax.

A common order of saving

There is no single right order, but a pattern many people follow looks like this. It is an example, not a recommendation for your situation.

1. Contribute enough to the 401(k) to get any employer match, because the match is extra money from your employer.
2. Consider an IRA for more investment choice, or a Roth IRA if you qualify and expect a higher tax rate later.
3. If you still have money to save, go back and raise your 401(k) contributions toward the limit.

Fees matter in both. A 401(k) with expensive funds can cost more each year than an IRA holding low-cost index funds. Your plan must disclose its fees; compare them with what you could pay in an IRA. The fee impact calculator shows how a fee difference adds up.

For Canadian readers

A traditional 401(k) or traditional IRA works much like an RRSP: tax break now, tax on withdrawal. A Roth IRA is closer in spirit to a TFSA, though the rules on who can contribute and when you can withdraw are very different. Canadians who move to or from the U.S. face cross-border rules this page does not cover, so speak with a tax professional who works with both systems.

FAQs

Can I have both a 401(k) and an IRA?

Yes. The IRS lets you contribute to a traditional or Roth IRA even if you take part in a retirement plan at work. Your traditional IRA deduction or Roth eligibility may be limited depending on your income.

Do I need a job to contribute to an IRA?

You need taxable compensation, or a spouse with taxable compensation if you file a joint return. Investment income on its own does not count.

Related Guides

• Roth vs Traditional IRA
• TFSA vs RRSP (Canada)
• 401(k) in the glossary
• IRA in the glossary

Sources

• IRS: 401(k) and profit-sharing plan contribution limits
• IRS: IRA contribution limits
• IRS: IRA deduction limits
• IRS: Traditional and Roth IRAs
• IRS: Exceptions to tax on early distributions

Reviewed by Greg Parsons. Links checked October 14, 2026. Educational only, not financial advice.