When it comes to planning for retirement, one of the best ways to grow your nest egg is by using tax-advantaged retirement accounts. Depending on your current tax situation and long-term goals, these retirement accounts could help you save money on taxes now or in retirement.

Two of the most popular retirement savings vehicles are the 401(k) and the IRA (Individual Retirement Account). With so much at stake when it comes to your retirement planning, it’s essential to understand the advantages 401(k) and IRA accounts offer, along with their features and limitations.

Here, we help you understand the differences between 401(k) vs IRA accounts and compare critical aspects such as tax advantages, contribution limits, and withdrawal rules. Whether you are deciding between a 401(k) vs IRA, a 401(k) vs a Roth IRA, or exploring whether you can have an IRA and 401(k) at the same time, this article will help clarify your options and guide you toward the best decision for you.

Understanding the Basics of 401(k) and IRA Accounts

What is a 401(k)?

If you’re employed, you might have access to a 401(k) account at your workplace. A 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their salary before taxes are deducted. This tax-deferred growth means that your money grows without being taxed until you withdraw it in retirement. (We will also touch on the Roth 401(k) option shortly, which offers a different tax treatment than regular 401(k) contributions.)

One of the biggest benefits of 401(k) plans is that many employers offer matching contributions, which can significantly boost your savings over time. If your employer offers a match — for example, 50% of the first 6% you contribute — take it. That’s an instant return on your investment.

Example: If you earn $80,000 and contribute 6% ($4,800), your employer might contribute an additional $2,400. That’s $2,400 you didn’t have to earn or save on your own.

What is an IRA account?

An IRA (Individual Retirement Account) is a personal retirement savings account that you can open independently of your employer. There are several types of IRAs, including Traditional and Roth IRAs, each with distinct tax implications.

In addition, if you’re a business owner, there are other IRA account types you can take advantage of such as SIMPLE or SEP IRAs, which you can learn more about in our blog Retirement Planning Tips for Business Owners.

Just like a traditional 401(k) account, a traditional IRA allows you to contribute pre-tax money and then invest that money to match your goals.

The IRA account has lower contribution limits than a 401(k), however, it often offers a lot more in terms of investment flexibility. You can open an account with your local financial advisor or through an online brokerage firm that offers IRA accounts.

Key Differences Between a 401(k) and an IRA

While anyone that earns income can open and contribute to an IRA, not everyone has access to a 401(k) unless their employer offers it. Only if your employer offers a 401(k), do you have the flexibility to decide whether to use a 401(k), an IRA, or both as part of your retirement planning strategy.

Understanding the differences between 401(k) and IRA accounts can make it easier to decide which one of these to use, or whether you can use both to maximize your retirement savings. Here are the key differences between the two. 

1. Contribution Limits: How Much Can You Save in a 401(k) vs IRA?

One of the biggest differences between a 401(k) and an IRA is how much you’re allowed to contribute each year.

• 401(k): In 2025, you can contribute up to $23,500 if you’re under 50. If you’re 50 or older, you’re eligible for an additional $7,500 catch-up contribution, for a total of $31,000.
  
• IRA: In contrast, the 2025 IRA contribution limit is $7,000 for those under 50, and $8,000 for those 50 or older.

This makes 401(k) plans an attractive option for those who want to save more aggressively — especially if you’re playing catch-up later in your career or aiming for early retirement. 

So how much should you contribute to a 401(k)? As much as you can without sacrificing your current living standard or having a solid 3-6 months cash cushion so that you still have access to liquid money in case of an emergency.

2. Investment Flexibility and Diversification

Contribution size isn’t everything. IRAs may have lower contribution limits, but they offer significantly more investment flexibility. You’re not confined to the fund lineup in your company plan. When you open an IRA, you can choose nearly any investment — including ETFs, mutual funds, individual stocks and bonds, and even alternative assets (in some cases). Your range of choices depends on where you open your IRA. Oftentimes, financial advisors may be able to offer a wide range of choices in addition to professional guidance on how to invest the money.

With a 401(k), your investment choices are typically limited to the options your employer provides — usually a small list of mutual funds, target-date funds, or bond funds. A 401(k) plan may only provide a dozen or so investment options, and these may come with higher expense ratios or lack key asset classes like international or small-cap investments, which can limit your ability to reduce risk through diversification.

An IRA may also allow you to save more money on investment fees as you can choose funds with lower internal expense ratios. This kind of control can make a big difference over time. Even a 1% difference in fees or returns can translate to tens of thousands of dollars more at retirement.

3. Tax Advantages

Both traditional 401(k) accounts and traditional IRA accounts offer upfront tax advantages: your contributions are made with pre-tax dollars, which means you could lower your taxable income in the year you contribute. For high earners, this can be a significant benefit. 

When you eventually withdraw funds from your 401(k) or IRA in retirement, you’ll pay ordinary income taxes on every dollar you take out. And unless you’re over age 59½, early withdrawals from either account usually come with a 10% penalty on top of taxes.

Where things start to diverge is in how the IRS treats these accounts once you hit your 70s. Required Minimum Distributions (RMDs) are mandatory for traditional IRA at age 73. Unlike with a 401(k), you can’t delay them by continuing to work. In some cases, employees can postpone RMDs from their current employer’s 401(k) as long as they’re still working and don’t own more than 5% of the company — a flexibility IRAs don’t offer.

What about Roth IRAs and Roth 401(k)s?

When it comes to the Roth versions of these accounts, both a Roth IRA and a Roth 401(k) are funded with after-tax dollars. This means that qualified withdrawals are 100% tax-free — and they’re not subject to RMDs during your lifetime. Roth 401(k) accounts used to require RMDs, but as of 2024, those requirements have been eliminated. This makes Roth accounts especially powerful for those looking to minimize taxes in retirement or leave behind a tax-free inheritance.

Benefits of a 401(k) vs IRA

Your income level, job status, and preference for convenience or control can all factor into which account will best support your retirement goals. Here’s a closer look at what makes each one appealing.

There are several compelling benefits to contributing to a 401(k), especially if your employer offers one:

• Employer Matching: Many employers match a percentage of your contributions, which is essentially free money for your retirement.
• Higher Contribution Limits: In 2025, you can contribute up to $23,500 (or $30,500 if you’re age 50 or older), making 401(k)s especially valuable for high earners looking to save more.
• Simplicity and Automation: Contributions are automatically deducted from your paycheck, which makes saving consistent and easy to maintain.
• Loan Options: Some 401(k) plans allow you to borrow from your balance, providing another layer of flexibility in emergencies (though this comes with risks).

Benefits of an IRA vs a 401(k)

IRAs also come with a strong set of advantages — particularly for those who want more control over their investments:

• Flexibility in Investments: You’re not limited to a preset list of funds like in most 401(k) plans. You can invest in individual stocks, bonds, ETFs, mutual funds, or even alternative assets in a self-directed IRA.
• Potential for Lower Investment Expenses: Depending on the investment options you choose within your IRA, you may be able to find ones that have lower internal expenses than the options that your 401(k) would offer.
• Independence from Employers: Because IRAs aren’t tied to your job, they’re portable and fully under your control, no matter where you work or if you retire early.

Why You Might Consider Rolling Over a 401(k) into an IRA

When you leave a job — whether you’re retiring or simply moving to a new employer — you typically have the option to roll your 401(k) over into an IRA. This can be a smart move for several reasons:

• Consolidation: Instead of having multiple old 401(k)s scattered across past employers, rolling them into a single IRA simplifies your financial life and makes it easier to track performance and manage distributions.
• Wider Investment Options: Most 401(k)s have limited investment menus. By rolling over to an IRA, you can access a broader selection of low-cost funds, ETFs, and other assets.
• Potentially Lower Fees: Employer plans often come with administrative fees or higher-cost mutual funds. IRAs let you shop around for low-cost providers and build a more cost-effective portfolio.

While rolling over isn’t always the best choice (especially if your 401(k) offers unique investment options, low fees, or loan access), it’s worth evaluating when you change jobs or retire. A financial advisor can help you determine what’s best based on your personal goals, tax situation, and long-term retirement needs. Not sure if it makes sense to roll over your 401(k)? Schedule a complimentary consultation with one of our local financial advisors in Tampa.

Can You — and Should You — Contribute to Both a 401(k) and an IRA?

Yes, you can contribute to both a 401(k) and an IRA in the same year — and for many people, this is an excellent strategy to increase retirement savings and diversify tax advantages. But whether you should contribute to both depends in part on your income, tax bracket, and whether your Traditional IRA contributions will be tax-deductible.

In 2025, the contribution limits are $23,500 for 401(k)s and $7,000 for IRAs. However, if you or your spouse is covered by a retirement plan at work, your eligibility to deduct Traditional IRA contributions is subject to income limits. 

These were the deduction limits as of 2024:

• Single filers: Full deduction if your modified adjusted gross income (MAGI) is less than $77,000; partial deduction up to $87,000; no deduction beyond that.
• Married filing jointly (you have a 401(k)): Full deduction under $123,000; partial up to $143,000; none above.
• Married filing jointly (spouse has a 401(k)): Full deduction under $230,000; partial up to $240,000; none above.
• Married filing separately: Partial deduction only up to $10,000 MAGI.

See the latest IRA deduction limits here.

Even if your Traditional IRA contribution isn’t deductible, you can still contribute — or consider a Roth IRA if your income allows. Roth IRA eligibility begins phasing out at $150,000 for single filers and $236,000 for married joint filers in 2025.

Ultimately, combining a 401(k) and IRA can be a savvy move: use the 401(k) to capture your employer match and reduce current taxes, and the IRA (Traditional or Roth) to add more flexibility and potentially tax-free growth. Just be sure to check where your income falls on the IRS deduction scale to make the most of your contributions.

Which Retirement Account is Best for You?

Selecting between a 401(k) and an IRA involves careful consideration of several factors:

1. Your Current Income and Tax Situation:
   If you are in a higher tax bracket now and expect to be in a lower bracket in retirement, a pre-tax 401(k) or Traditional IRA might be beneficial. Conversely, if you expect to be in a higher tax bracket later, a Roth IRA may be the wiser choice.
2. Employer Contributions:
   If your employer offers matching contributions, taking full advantage of your 401(k) is often a must. This benefit can significantly increase your retirement savings.
3. Investment Flexibility:
   Consider how important investment flexibility is to you. If you prefer a wide array of investment options, an IRA might be more suitable.

Ultimately, consulting with a financial advisor can provide personalized insights, ensuring that your retirement plan is well-suited to your unique situation. With careful planning, disciplined saving, and a clear understanding of your options, you can get another step closer to achieving your financial goals.Want some guidance as you plan for your retirement and grow your wealth? Schedule a complimentary consultation with one of our financial advisors today.