IRA vs. 401(k): What Are the Differences?

Individual retirement accounts, or IRAs, and 401(k) plans are tax-advantaged ways to save for retirement. There are several key differences between the two types of accounts, including that a 401(k) is an employer-sponsored retirement plan while an IRA is one you can open on your own, independent of any employer. These accounts also have different contribution limits, tax benefits and eligibility criteria.

Let’s explore the differences between IRAs and 401(k)s.

What is an IRA?

An IRA is a retirement investment vehicle you can have in addition to an employer-sponsored retirement account, like a 401(k), 403(b), or 457. There are two types of IRAs — traditional and Roth — and you may choose one over the other depending on how you’d prefer to pay taxes on your funds.

Let's take a look at the two types of IRAs and their contribution limits.

Traditional IRA

A traditional IRA is funded with pre-tax dollars, which grow tax-deferred until retirement. After age 59 1/2, you can take penalty-free withdrawals from a traditional IRA, which will be included in that year’s taxable income. If you expect lower tax rates in retirement, you may want to consider a traditional IRA.

Roth IRA

A Roth IRA is funded with after-tax dollars, which grow tax-free. After age 59 1/2, and assuming it’s been at least 5 years since your first contribution, you can take tax- and penalty-free withdrawals from the account, which are not included in your taxable income. If you expect to be in a higher tax bracket when you retire, you may be inclined to choose a Roth IRA over a traditional IRA.

IRA Contribution Limits

The contribution limit for IRAs in 2026 is $7,500 with a catch-up contribution of $1,100 for individuals aged 50 and over. While there are no income limits for a traditional IRA, you may not be eligible to contribute to a Roth IRA if you make over a certain amount. Similarly, if your adjusted gross income (AGI) is above a certain level and you have a retirement account through your employer, you may not be able to deduct contributions to a traditional IRA from your taxes.

What is a 401(k)?

A 401(k) is an employer-sponsored retirement plan that allows you to invest money for your future. Unlike IRA contributions, which may be limited or restricted for high-earning individuals, a 401(k) is generally available to qualifying individuals at a company regardless of compensation. Employers may also choose to incentivize employees to participate by offering a contribution to all participant accounts or matching contributions up to a certain percentage or amount. For example, an employer might match the first 3% of an employee’s 401(k) contributions, which would double the investment for employees who participate and set aside 3% of their earnings.

401(k) plans, like IRAs, can be traditional or Roth. Let's examine the two types of 401(k)s and the contribution limits for them.

Traditional 401(k)

A traditional 401(k) uses pre-tax contributions, which may help lower taxable income and AGI. Like traditional IRAs, traditional 401(k)s may be more beneficial for you if you expect to be in a lower tax bracket during retirement than you currently pay, since you contribute pre-tax dollars.

Roth 401(k)

A Roth 401(k) uses after-tax contributions and has the benefit of tax-free growth and tax-free withdrawals in retirement. For that reason, if you plan on entering a higher tax bracket during retirement, you may benefit from a Roth 401(k). That said, your employer contributions will still go into a pre-tax account and will be taxed when they're distributed, like traditional IRA funds.

401(k) contribution limits

For tax year 2026, the contribution limit for a 401(k) is $24,500. Individuals aged 50 and over may also contribute up to $8,000 in catch-up contributions. Employees ages 60, 61, 62 and 63 can benefit from an even higher catch-up contribution limit of $11,250.

It’s important to note that the contribution limit for a 401(k) outlined above does not consider an employer match. An employer match may make the total contribution higher, though limits do still apply, and the invested amount cannot be more than 100% of an employee’s total compensation.

Comparing IRAs and 401(k)s

401(k)s and IRAs are both tax-advantaged ways to help individuals save for retirement. However, the way they operate when it comes to taxation, eligibility, contribution limits and other factors varies. The table below breaks down the key differences between the two types of accounts.

As long as you meet eligibility requirements for each account, you can contribute to both an IRA and 401(k) in the same tax year up to the annual contribution limits.

For both IRAs and 401(k)s, the contribution limits still apply if you have multiple accounts. For example, if you have a traditional and Roth IRA, you may contribute to both accounts as long as the sum doesn’t exceed the annual contribution limit. Similarly, if you work at two companies where you’re eligible for a 401(k), you can participate in both plans, but you’ll be subject to the annual contribution limit for the two accounts combined.

Choosing between an IRA and 401(k)

Choosing between an IRA and 401(k) can be complex. However, there are instances where one retirement account may better meet your needs.

An IRA may make sense in many cases, including when:

• You’re self-employed
• You don’t have access to an employer-sponsored retirement plan at your job
• You want more control over your investments

A 401(k) may make sense in many cases, including:

• You receive an employer match for your contribution
• You want to contribute a larger amount than an IRA allows

Before you commit to a 401(k) or IRA, be sure to assess the merits of each account alongside your long-term financial goals.

Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.