Are IRAs and 401ks the Same? Key Differences
Discover how 401(k)s and IRAs differ in their core structure, affecting everything from how you open an account to the flexibility you have with your money.
While both Individual Retirement Arrangements (IRAs) and 401(k) plans are tax-advantaged accounts designed to help you save for the future, they have different rules and features. A 401(k) is a retirement savings plan sponsored by an employer, while an IRA is a personal retirement account that an individual opens independently.
Account Establishment and Eligibility
The difference between a 401(k) and an IRA begins with how they are created. A 401(k) plan is an employer-sponsored benefit, meaning you can only participate if your employer offers one and eligibility is tied to your employment status. A plan can require an employee to be at least 21 years old and to have completed one year of service, often defined as working at least 1,000 hours in a 12-month period.
Some plans may have less restrictive requirements, while new rules for 2025 require employers to allow long-term, part-time employees who work at least 500 hours for two consecutive years to participate.
An IRA is not tied to an employer. Any individual with earned income can open an IRA through various financial institutions like banks or brokerage firms, and even a non-working spouse may be able to open one. This independence from an employer gives individuals greater control, as the account belongs to you regardless of where you work.
Contribution Rules and Limits
Regulations governing contributions differ in terms of limits and income restrictions. For 2025, an employee can contribute up to $23,500 to their 401(k). Individuals age 50 and over can make additional “catch-up” contributions of $7,500, while a new provision allows those aged 60 to 63 to contribute an even larger catch-up of $11,250, if their plan allows it.
A benefit of 401(k)s is the potential for an employer match. This is when your employer contributes to your account based on your own contributions. A common matching formula is a dollar-for-dollar match up to 3% of your salary, and then a 50-cent match for each dollar you contribute on the next 2% of your salary.
These employer contributions do not count toward your individual limit but are part of an overall 2025 limit of $70,000, combining both employee and employer funds.
IRA contribution limits are lower. For 2025, the maximum you can contribute to all your IRAs is $7,000. The catch-up contribution for those age 50 and over is an additional $1,000.
The ability to contribute to a Roth IRA or deduct contributions to a Traditional IRA can be limited by your income. For 2025, Roth IRA contributions begin to phase out for single filers with a Modified Adjusted Gross Income (MAGI) between $150,000 and $165,000, and for joint filers between $236,000 and $246,000.
The tax deductibility of Traditional IRA contributions also depends on income if you or your spouse are covered by a workplace retirement plan. For 2025, the deduction for single filers covered by a plan phases out with a MAGI between $79,000 and $89,000. For married couples filing jointly where the contributor is covered, the range is $126,000 to $146,000.
Investment Choices and Management
The range of available investment options marks a distinction between 401(k)s and IRAs. In a 401(k), your investment choices are confined to a menu selected by your employer. This list consists of a curated selection of mutual funds, target-date funds, and sometimes company stock, which restricts your ability to build a highly customized portfolio.
In contrast, an IRA offers a broader universe of investment choices, giving you direct control. When you open an IRA at a brokerage firm, you can invest in a wide array of securities, including individual stocks, bonds, exchange-traded funds (ETFs), and mutual funds. This flexibility allows for more personalized investment strategies but also requires a more hands-on approach to research and manage your investments.
Accessing Your Funds
The rules for withdrawing money from 401(k)s and IRAs have similarities and differences. The IRS imposes a 10% penalty on withdrawals made before age 59½, in addition to regular income taxes on the withdrawn amount.
A feature available in many 401(k) plans is the ability to take out a loan against your account balance, a provision not permitted with IRAs. IRS rules allow you to borrow up to 50% of your vested account balance, with a maximum loan of $50,000. These loans must be repaid with interest within five years, though a longer repayment period may be available for loans used to purchase a primary residence.
Both Traditional 401(k)s and Traditional IRAs are subject to Required Minimum Distributions (RMDs). The age for when RMDs must begin is 73 for individuals born between 1951 and 1959, and it will rise to 75 for those born in 1960 or later. Failing to take the full RMD can result in a penalty of 25% of the amount not withdrawn, which can be reduced to 10% if corrected in a timely manner. Roth IRAs are not subject to RMDs during the original owner’s lifetime.
Some 401(k) plans may permit hardship withdrawals for a financial need, which can be exempt from the 10% early withdrawal penalty. A “rule of 55” also allows an individual who leaves their job in the calendar year they turn 55 or older to take penalty-free distributions from that specific 401(k). This rule does not apply to IRAs.
Moving Funds Between Accounts
Transferring funds from one retirement account to another, known as a rollover, is a common action when changing jobs. The primary reason individuals move money from a 401(k) to an IRA is to gain access to a wider range of investment options and consolidate accounts.
There are two methods for executing a rollover: a direct rollover and an indirect rollover. A direct rollover is where the funds are transferred directly from your 401(k) plan administrator to the financial institution hosting your new IRA. This can be done via an electronic transfer or a check made payable to the new custodian, ensuring you avoid any tax consequences.
An indirect rollover is more complex. In this scenario, your former employer sends you a check for your 401(k) balance, from which they are required to withhold 20% for federal income taxes. You then have 60 days to deposit the full original amount into your new IRA. If you fail to deposit the full amount within the 60-day window, the shortfall is considered a taxable distribution and may be subject to the 10% early withdrawal penalty.