IRA vs 401(k): How Do They Differ & Which Is Right for You?

IRAs and 401(k)s are tax-advantaged investment accounts intended for retirement planning. Each has unique features to help you save for the future.

Both individual retirement accounts (IRAs) and 401(k)s are tax-advantaged investment accounts designed to help you save towards retirement.

Each has its own unique features, such as contribution limits, eligibility, and employer matching, that may make one more advantageous than the other.
Consider how using one or both types of accounts might be beneficial towards achieving your financial goals.
IRAs and 401(k)s are tax-advantaged retirement accounts intended to help you save towards financial independence. While both provide many benefits over regular, taxable savings and investment accounts, they each have their own unique features that may enhance your retirement strategy. Here's what you need to know about the differences between an IRA vs 401(k).

What Is an IRA?

An IRA is an investment account that receives special IRS tax treatment. Contributions are invested in a variety of asset options (mutual funds, ETFs, stocks, etc.) where they may compound in value over time and help bring you closer to your retirement goals.

Traditional vs. Roth IRAs

There are two main types of IRAs based on the way they are taxed:

Traditional IRAs - This type of IRA is not taxed at the time of your contribution. The balance grows tax-deferred until years or even decades later when you're ready to retire (after age 59-1/2). Withdrawals are then taxed as ordinary income.
Roth IRAs - Roth IRAs are the opposite of traditional IRAs. They are funded using after-tax contributions, where they’ll grow tax-free for as long as they're in the account. Once you retire (after age 59-1/2), withdrawals may be made tax-free.

Where to Open an IRA

Unlike employer-sponsored retirement plans, you’re free to open an IRA anywhere they're offered. This could be with PNC or any other reputable financial service provider of your choice.

To be eligible or make deductible contributions, you’ll need to have earned income as well as meet certain income limits set by the IRS (depending on your tax filing status and IRA type).

What Is a 401(k)?

A 401(k) is an employer-sponsored retirement account. Similar to an IRA, the intention of a 401(k) is to regularly make contributions that may compound in value over time and help you achieve your retirement goals. However, investment options are typically limited to a pre-selected list approved by the 401(k) administrator.

Traditional vs. Roth 401(k)

Like an IRA, some 401(k) plans may be traditional or Roth. Hence, participants will need to decide if they would like to pay taxes now (i.e., Roth-style plan) or pay them in the future (i.e., traditional-style plan).

However, not all 401(k) plans offer the Roth option. Whereas Roth IRAs are fairly common, some plan administrators have not yet chosen to allow participants to make Roth-style contributions to their 401(k).

Employer Matching

Although several features differentiate IRAs vs 401(k)s, one major difference is employer matching. To motivate 401(k) participation, many employers offer to make contributions alongside your contributions. This could be any amount they choose (such as dollar for dollar) and up to some pre-set limit (for example, up to 5% of your gross pay).

Employer matching contributions are a helpful way to enhance your nest egg. The additional funds could accelerate your savings progress or be used to offset your personal contribution rate to the 401(k).

IRAs, on the other hand, do not receive employer matching. Because they are individually managed, they are external to your employer and do not receive this benefit.

Key Differences Between IRAs and 401(k)s

Topic	IRA	401(k)
Traditional vs Roth Options	Typically, both options are available.	Accounts are usually traditional by default. However, some plan administrators do allow for Roth-style contributions.
Eligibility ^[1]	Generally, anyone with earned income may contribute.	Must be employed by the company to begin participating. You must also be 21 years old and complete at least one year of service (working at least 1,000 hours in a 12-month period).
Income Limits ^[2]	Eligibility may depend on your reported income, tax filing status, and if your spouse participates in employer-sponsored retirement plan.	No income limits unless you qualify as a highly compensated employee (As of 2025: $160,000 or more).
Contribution Limits ^[3]	As of 2025: $7,000	As of 2025: $23,500
Catch-Up Contributions ^[3]	As of 2025: $1,000 if you’re 50 and older	As of 2025: $7,500 if you’re age 50 and older. $11,250 if you’re age 60 and older (per the SECURE 2.0 Act).
Employer Matching Contributions	None.	Often yes. However, this will be at the employer's discretion. Contributions, limits, and vesting schedule will vary.
Financial Provider	May be opened at a provider of your choice.	May only use the provider selected by your plan administrator.
Investment Choices	You may invest in any asset allowed by the financial provider. This typically includes mutual funds, ETFs, stocks, bonds, etc. Some providers even allow for less-common assets like gold or real estate.	Generally, you may only choose from a pre-selected list of mutual funds.
Fees	Accounts are generally free to open. Each investment may also carry its own independent expense.	Each investment fund will typically charge its own independent expenses. There is also usually a maintenance fee charged by the plan administrator. Depending on your plan, some of this expense may be absorbed by your employer.
Withdrawal Rules ^[4]	Withdrawals may be made after age 59-1/2. Otherwise, a 10% early withdrawal penalty applies. Ordinary income taxes apply. Certain hardship withdrawals may be made before age 59-1/2 if they meet IRS guidelines (medical expenses, first-time home, etc.) Roth IRA contributions may be withdrawn at any time.	Withdrawals may be made after age 59-1/2. Otherwise, a 10% early withdrawal penalty applies. Ordinary income taxes apply. If you leave your job during or after the year you turn age 55, you can take penalty-free distributions.
Borrowing ^[5]	Borrowing is not permitted.	If approved by your plan administrator, you may borrow (tax-free) as much as 50% of your vested account balance or $50,000, whichever is less. Funds must be paid back with interest within five years. Otherwise, the 10% early withdrawal penalty applies.
RMDs (Required Minimum Distributions) ^[6]	For traditional accounts, RMDs generally start at age 73. For Roth accounts, RMDs are not required unless you received the account as the beneficiary from a previous account owner.	Same as an IRA

Which Is Right for You?

IRAs and 401(k)s are both powerful tools for helping working Americans save towards their financial goals. However, one plan or the other might make a better fit for your unique financial situation.

The following are a few scenarios where prioritizing one type of plan over the other might be more advantageous.

When a 401(k) Might Work Better

You wish to save more than the annual IRA contribution limits.
Your employer offers matching contributions.
The plan has low fees and good investment options.

When an IRA Might Work Better

Your employer doesn’t offer a 401(k) or any other retirement plan.
You’d like to invest in assets not offered by your employer’s 401(k) plan.
You’d like to make Roth-style contributions, but your 401(k) plan doesn’t allow them.

Frequently Asked Questions (FAQ)

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

Typically, yes. As long as you meet the IRS requirements for income, you may be able to make annual contributions to both an IRA and a 401(k).

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

Both IRAs and 401(k)s are owned by individuals. Therefore, as long as each spouse meets the IRS requirements, they may contribute to both.

What happens if I leave my job with a 401(k)?

When you separate from an employer, the following options are available for the balance of your 401(k):

Leave the funds right where they are with the current 401(k).
Move the funds into your new employer's 401(k) plan.
Roll the funds into an IRA.
Withdraw the funds.

What does it mean to roll over a 401(k) to an IRA?

The term "rolling over" simply means moving the balance of your 401(k) into an IRA. This is a fairly common practice as workers change jobs. It may give you better control over the funds, such as deciding which assets to hold and finding lower-cost alternatives.

Can self-employed individuals have a 401(k) or IRA?

Instead of a regular 401(k), self-employed individuals have three unique options for saving towards retirement:

Solo 401(k)
SEP IRA
SIMPLE IRA

Self-employed individuals may also contribute to a regular traditional or Roth IRA as long as they meet the IRS requirements for eligibility.

Final Thoughts: IRA vs 401(k)

Although IRAs and 401(k)s are both great for helping you save towards your retirement goals, they have their own unique features that may make one more advantageous than the other. 401(k)s have higher contribution limits than IRAs and typically offer employer matching. However, IRAs may offer greater flexibility over which investments are allowed and potentially lower fees.

You should consider how the pros and cons of each might fit into your financial situation and determine if one or both accounts are right for you. If you're unsure or just want a second opinion, feel free to seek out the advice of a certified financial professional.

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