IRA vs. 401k

IRA vs. 401k

There are plenty of options for retirees today. Two of the main ones include the IRA and 401(k), and while both offer an excellent way to protect your retirement savings, there are a few differences to be aware of.

Understanding what makes retirement accounts different will help you make the most out of your investments. Also, you’ll have a better way to manage your income taxes and other factors.

Understanding 401(k) and IRA

What Is a 401(k)?

A 401(k) is a retirement savings plan offered by employers. You can contribute your income to this account while letting your employer match these contributions in some cases.

You can get a traditional or Roth 401(k), depending on whether you want to work with pre-tax or after-tax dollars.

The goal of the 401(k) is to encourage employees to save for retirement and possibly get tax benefits.

Employee Contributions to 401(k)

You can contribute up to the limits set by the IRS. If you open a traditional account, you’ll get an upfront tax deduction since you’ll pay taxes upon withdrawal. A Roth 401(k), however, allows your contributions to grow tax-free until you withdraw. Unfortunately, these contributions aren’t tax-deductible.

Contribution limits are adjusted to account for inflation every year. In the case of 2024, the annual limit is $23k per year for employees under 50. If you’re over 50 years old, you can make an additional $7,5k contribution.

Employer Matching in 401(k)

Some employers decide to match a percentage of your contribution each time you deposit. In other words, they add a portion of money to your 401(k) each time you contribute. Usually, mid- and large-sized companies offer this benefit.

While employers can match up to 100% of your contributions, not all of them do it. In 2024, an employer can offer up to 100% of compensation or $69k, whichever is less. Whether you get matching contributions or not depends on your employment circumstances.

rmds in an individual retirement account

401(k) Withdrawal Rules

You can start making penalty-free withdrawals after you reach age 59 ½, unless you qualify for a withdrawal under special circumstances, such as medical expenses, hardships, family circumstances, etc.

If you decide to leave your money in the account, you must start making required minimum distributions (RMDs) at age 72, unless you opened a Roth plan.

Making an early withdrawal will result in you getting a 10% penalty plus the taxes you’ll owe in the amount you’re getting out.

Defining an IRA

An IRA is known as an “Individual Retirement Account.” Unlike the 401(k), an IRA offers many investment options, including bonds, stocks, and more.

IRA Contribution Rules

IRAs work similarly to 401(k) plans. If you open a traditional IRA, you’ll make tax-deductible contributions, whereas Roth IRAs don’t.

You’ll also get annual contribution limits. In the 2023 tax year, the contribution limits are $6,400 for those under 50 and $7,500 for people over 50.

As per Roth IRA contribution rules, in 2024, this limit increases to $7,000 for those under 50 and $8,000 for those over 50. Unlike the 401(k) plan, you’re responsible for funding your account.

Types of IRAs: Traditional and Roth

While we could be examining IRA types in detail, we will focus on the two main types of IRAs.  Let’s provide some comparison of Roth IRAs and traditional IRAs. The traditional IRA, as mentioned previously, allows you to make tax-deductible contributions. This is a great idea if you plan on being in a lower tax bracket. You can easily make a traditional IRA contribution and not worry about taxes until you withdraw.

Roth IRAs, on the other hand, are only available to those with certain qualifications. You still need to follow contribution and income limits, although you get the advantage that your money will grow tax-free.

You will pay taxes on your Roth IRA contributions right away, which means great news if you think you’ll be in a higher tax bracket when you retire. In the end, you won’t pay income taxes when withdrawing.

When comparing Roth IRA and traditional IRA, both plans offer a tax benefit; it all comes down to your goals.

IRA Withdrawal Guidelines

By understanding IRA withdrawal rules, it should be clear that you can only make withdrawals when you’re age 59 ½ or older. Roth IRAs also require the account to be at least five years old if you want to make penalty-free withdrawals.

Not following these rules could result in a penalty, increasing your tax bill.

Contrasting 401(k) and IRA

Let’s compare the 401(k) and IRA in depth:

tax penalties and implications

Tax Implications

All contributions you make in your 401(k) will lower your taxable income for the year they’re made. Unless you open a Roth 401(k), your withdrawals will be taxed as ordinary income. The same goes for IRAs.

However, matching funds treated as a Roth 401(k) contribution are taxable, which can get that tax bill a bit higher in some cases.

Contribution Limits Comparison


  • $22,500 for the 2023 tax year (or $30,000 for those who are over 50).
  • $23,000 for the 2024 tax year (or $30,500 for those over 50).


  • $6,500 for the 2023 tax year (or $7,500 if you’re over 50).
  • $7,000 for the 2024 tax year (or $8,000 if you’re over 50).

Early Withdrawal Penalties

Both the 401(k) and IRA can get you a 10% penalty for early withdrawals. In both cases, you could apply for an exception.

Understanding Required Minimum Distributions (RMDs)

The 401(k) and IRA ask you to take RMDs as soon as you reach 72 years of age. However, if you get a Roth IRA, you don’t need to take RMDs.

Weighing the Pros and Cons of 401(k) and IRA

Benefits of 401(k)

  • High contribution limits
  • Income tax benefits
  • Ability to take a loan
  • Lower taxable income at the time of contributing
  • Possibility of getting matching contributions

Drawbacks of 401(k)

  • Limited flexibility
  • Considerable fees
  • Early withdrawal penalties

Advantages of IRA

  • Potential tax benefits
  • Wide range of investment options to choose from
  • More flexibility
  • Lower fees

Limitations of IRA

  • Low annual contribution limits
  • Early withdrawal penalties
  • Required minimum distributions if you get a traditional IRA

Deciding Between 401(k) and IRA

Both options seem to be great for most people, right? It may be tough to decide which retirement account to go with.

In this section, we’ll cover scenarios where you may choose a 401(k) and others where an IRA may be a better option.

Situations Favoring a 401(k)

You may go for a 401(k) if you’re already working in a place that offers it. It’s even better if your workplace offers matching contributions since they give you the chance to earn more money.

Sometimes, 401(k)s can protect you from creditors, which isn’t something you’ll find with an IRA.

Another factor to consider is contribution limits. 401(k) plans offer a much higher contribution limit for employees, meaning you can get more money in over the years.

Scenarios for Choosing an IRA

IRAs are ideal for those who don’t have access to a retirement account through their workplace. Even if you get access to a 401(k) plan, check if it offers employer matching. If it doesn’t, an IRA may be a better idea since it’s easier to set up and it’s also more flexible for the investor.

You can invest in many more asset classes with an IRA, which can make your diversification process much easier.

There’s no “better” option here. Make sure to choose something that fits your goals and needs. Everyone has particular circumstances, so do research and pick the option that you feel the most comfortable with.

Keep in mind that you can have both accounts if you want (we’ll talk more about that below).

401k to gold ira rollover guide

Merging 401(k) and IRA: Optimal Benefits

Merging or doing a rollover can essentially give you “the best of both worlds.” If you already have an old 401(k), you can expand your investment horizon by rolling your funds into a new IRA.

Sometimes, you could simply roll over your money to a new 401(k) plan, but this option isn’t always available, especially if you’re not looking for another job.

Of course, you could also keep both accounts. While this may seem like a great plan to diversify your retirement portfolio, it may not be always the best idea. If you’re leaving an old job, for example, the best option will often be to roll everything over to an IRA instead of another 401(k).

Moreover, consolidating your retirement accounts will make it easier for your beneficiaries to inherit your estate after you pass away.

Finally, you can expect lower fees since you will only have one account.

Exploring Other IRA Types

Even though the traditional and Roth IRA are the two most common ones, there are two more plans that you may be interested in if you are a self-employed individual or small business owner.

SEP IRAs: An Overview

The “Simplified Employee Pension Plan” is similar to the traditional IRA. Here, employers can make tax-deductible contributions toward their employee’s account. SEP IRAs are recommended for self-employed people or small business owners, as they allow them to easily contribute toward their employees’ retirement, as well as their own.

In 2023’s tax year, the contributions can’t exceed the lesser of $66,000 or 25% of the employee’s compensation.

Understanding SIMPLE IRAs

The “Savings Incentive Match Plan for Employees” plan, on the other hand, allows both the employer and employee to contribute to an IRA. One of the SIMPLE IRA’s key features is that the employee can have their contributions deducted from their pay. These contributions grow tax-deferred until they withdraw.

This plan is only available for employers with 100 employees (or less) who earn more than $5,000 in the preceding year.

Employees in a SIMPLE IRA can contribute up to $15,500 in the 2023 tax year, although employers can add more.

Investment Strategies for 401(k) and IRA

Diversification in 401(k) and IRA

Diversification is key when it comes to any retirement savings account. In other words, try not to put all your eggs in one basket if you want to avoid risks.

If you want to diversify your portfolio, make sure to divide your investment across different asset classes. You may seek help from a professional in this step.

Managing Investment Risks

You must understand your risk tolerance (or how much you’re willing to lose). All investments come with a risk, so you must analyze whether yours will be worth it in the long run.

Another great tip is to avoid risky investments, especially if you don’t have too much experience in this field. Even though you may be tempted to risk it, it’s not worth it most of the time.

Maximizing Employer Match in 401(k)

Maximizing your employer match is a great way to earn more money for retirement. Some tips we can give you include:

  • Set up automatic withholds.
  • Find a job that offers a great 401(k) match.
  • Consider your employer’s waiting periods. Some ask you to work at the company for many years before they start to match your contributions.
  • Follow all the 401(k) matching rules provided by the employer.
  • Consider adjusting your contribution rate.
  • Don’t forget your 401(k) vesting schedule.

real estate is one of the ira investment options

IRA Investment Options

IRAs allow you to invest in many assets, depending on which ones you open. They include:

  • ETFs
  • Mutual funds
  • Cryptocurrencies
  • Bonds
  • Stocks
  • CDs
  • Real estate
  • Precious metals

Rollover Options: 401(k) to IRA

If you decide that a traditional or Roth IRA is a better investment tool for you, it’s easy to make a rollover.

Keep reading to see all the options you have available.

Understanding Rollover Process

A rollover is a process where you transfer your 401(k) funds to your new IRA. When you do a rollover correctly, you will not have to pay taxes/penalties.

The first thing you must do is to decide which type of IRA you want to open. Remember you have two main options: Traditional IRA and Roth IRA.

Once you’re done, choose an IRA provider. Take your time until you find a highly-rated professional who can offer the services you need. Remember that some IRA providers offer higher fees in exchange for their services.

Finally, you can choose between a direct or indirect rollover. The indirect rollover will transfer your 401(k) funds to your account. You’ll have 60 days to transfer that money to your new IRA if you don’t want to get penalized.

The direct rollover, however, makes the transfer between your old and your new account. You won’t have to do anything, so many consider this the better option.

Tax Implications of Rollover

There are two main rules you must be aware of if you’re making a rollover. Here’s what you should know:

If you decide to make an indirect rollover, you will get 60 days to deposit that money into your IRA. Missing that deadline will cause consequences, as the IRS will consider that an early withdrawal.

Making an early withdrawal may cause you to owe a 10% early withdrawal penalty on top of your taxable income.

On the other hand, you must consider percentages. Typically, you’ll receive a check from your 401(k) that equals the amount you had minus 20%. This is because the administrator of your 401(k) withholds 20% to pay distribution taxes.

All you must do to get the remaining balance is to deposit the amount withheld into your account so that you get the rest. When tax time comes, the IRS will see that you deposited everything and will refund what was withheld in taxes.

timing rollover from 401k to an ira

Timing a Rollover

People often ask, “When should I make the rollover?” It may not seem like it, but timing is as important as the rest of the process.

If you have an old 401(k), you have three options:

  • Leave your money where it is if your ex-employer lets you.
  • Cash everything out.
  • Roll everything into a retirement plan.

Ideally, you should start the rollover process after changing jobs or as soon as you want to explore more investment options. We don’t recommend you start the rollover right after retiring, as this may not leave too much time to let your investment grow.

Frequently Asked Questions

Read this FAQ section if you have more doubts about the differences between the IRA and the 401(k).

Is a 401(k) Considered an IRA for Tax Purposes?

No. Even though both the IRA and 401(k) are retirement accounts, the 401(k) is a type of “employer-sponsored” account, whereas the IRA, as its name suggests, is an “individual retirement account.”

In other words, you shouldn’t include your 401(k) amounts when reporting taxes, as they’re not considered IRAs.

Can You Lose Money in an IRA?

Technically, yes, you can lose money in an IRA. Your investments can experience losses due to various factors, including market volatility, asset selection, early withdrawal fees, penalties, etc.

Can You Roll a 401(k) into an IRA Penalty-free?

Yes, you can do a rollover without any penalties. However, you must follow all the rules established by the IRS.

Is It Better to Max Out 401(k) or Roth IRA?

In most cases, it’s better to match your 401(k) to get all the benefits of your employer match. Once you’re done, you can move on to your Roth IRA.

Can I Take a Loan from My IRA or 401(k)?

You can borrow money from your 401(k), but you can’t do the same for your IRA. The only way to get your money out of your IRA is to wait until you can make qualified withdrawals or see if your withdrawal falls into the “exception” category.


The “Individual Retirement Account” and the 401(k) are great for most people. They offer unique benefits that allow you to invest properly, get tax benefits, and more. Since IRAs offer different types of accounts, however, you must take your time to decide which one will help you reach your goals.

Retirement planning shouldn’t be taken lightly. Regardless of which option you’re aiming for, you must understand what makes them different. Moreover, if you’re struggling to organize your retirement, don’t hesitate to contact a financial advisor. You won’t regret it.

Arthur Karter


Hi, I’m Arthur, and nobody wants to wake up in their 50s like me that they are in serious debt with minimal assets. This wake-up call forced me to reevaluate everything. After going through the school of Hard Knocks, I’m ready to help you by sharing the best retirement choices and how they differ from all the same-old, same-old options that financial advisors sell. These alternatives will help you build and protect your wealth.

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