401(k) vs. IRA: What's the difference?

A 401(k) is sponsored by your employer; an IRA is an account you open yourself. Both offer tax advantages for retirement savings, but they differ in contribution limits, investment choices, and eligibility rules. Most people benefit from using both.

Both 401(k) plans and Individual Retirement Accounts (IRAs) are IRS-sanctioned ways to save for retirement with tax advantages. The fundamental difference: a 401(k) is set up and administered by your employer, while an IRA is an account you open independently at a bank, brokerage, or mutual fund company. Understanding how they complement each other helps you maximize tax-advantaged savings.

Contribution limits

The limits are not even close. For 2024, you can contribute up to $23,000 to a 401(k) ($30,500 if age 50+). IRA contributions are capped at just $7,000 per year ($8,000 if age 50+). These limits are separate — maxing out a 401(k) does not reduce how much you can put into an IRA, and vice versa.

Investment choices

A 401(k) offers only the investments your employer's plan includes — often a curated list of mutual funds and target-date funds. An IRA, by contrast, gives you access to nearly any stock, bond, ETF, or mutual fund available at your chosen brokerage. This flexibility is one of the main reasons investors prioritize IRAs for certain strategies after capturing any employer match in their 401(k).

Roth option availability

Both account types have a Roth version. A Roth 401(k) is offered at the employer's discretion — not all plans include it. A Roth IRA is available to anyone whose income falls below IRS phase-out thresholds (for 2024: $146,000–$161,000 single filer; $230,000–$240,000 married filing jointly). High earners may not be eligible for a Roth IRA at all.

401(k): employer-sponsored, $23,000 limit (2024), limited investment menu, often includes employer match.
IRA: self-directed, $7,000 limit (2024), open investment universe, no employer match.
Both have traditional (pre-tax) and Roth (after-tax) variants.
Roth IRA income limits apply; 401(k) has no income eligibility cap.
General strategy: contribute to 401(k) up to the employer match first, then max an IRA, then return to the 401(k).

Which should you prioritize?

A common framework: (1) contribute to your 401(k) up to the full employer match — that match is part of your compensation; (2) max out an IRA for the broader investment flexibility; (3) if money remains, continue increasing your 401(k). This is a general heuristic, not tax advice — a financial professional can tailor a strategy to your income, tax bracket, and goals.

IRS limits at a glance (2024)

The 401(k) elective deferral limit for 2024 is $23,000 ($30,500 with age-50+ catch-up). — IRS
The IRA contribution limit for 2024 is $7,000 ($8,000 if age 50 or older). — IRS
Roth IRA contributions are phased out for single filers with modified AGI between $146,000 and $161,000 in 2024. — IRS

Key takeaways

401(k) limits are more than 3x IRA limits — use both to maximize tax-advantaged space.
Capture the full employer match in your 401(k) before directing money elsewhere.
IRAs offer broader investment flexibility than most employer 401(k) plans.
Roth IRA eligibility phases out at higher incomes; Roth 401(k) has no income limit.
Consult a financial professional to decide the right order of contributions for your tax situation.