IRA vs. 401(k): Which Is Better for Your Retirement Plan?

Joseph Johnson
3 days ago
2 min read

Choosing the right retirement account is a key step toward building a secure financial future. Two of the most popular options are the Individual Retirement Account (IRA) and the 401(k) plan. But with so many variations, like traditional versus Roth accounts, it’s important to understand the differences before making your decision.

In this guide, we’ll compare IRA vs 401k and help you decide which is better for your retirement goals.

What Is a 401(k)?

A 401(k) is an employer-sponsored retirement plan that lets you save and invest money directly from your paycheck before taxes are taken out. Many employers also offer matching contributions, which is essentially free money to boost your savings.

Contribution limits: $23,000 in 2024, with a $7,500 catch-up for those 50 or older
Tax benefits: Contributions reduce your taxable income; taxes are paid on withdrawals
Investment options: Typically limited to funds selected by your employer
Roth 401(k) option: Some employers offer Roth 401(k)s, where contributions are made after-tax, but withdrawals are tax-free

What Is an IRA?

An IRA is an individual retirement account you open on your own, outside of your employer. IRAs come in two main types: Traditional and Roth.

Contribution limits: $7,000 in 2024, with a $1,000 catch-up for those 50 or older
Traditional IRA tax benefits: Contributions may be tax-deductible, but withdrawals are taxed
Roth IRA tax benefits: Contributions are made with after-tax dollars, but qualified withdrawals are tax-free
Investment options: Broad freedom to invest in stocks, bonds, mutual funds, ETFs, and more

Roth IRA vs 401(k): Key Differences

Feature	Roth IRA	401(k) (Traditional or Roth)
Contribution limit	$7,000 ($8,000 if 50+)	$23,000 ($30,500 if 50+)
Tax treatment	After-tax contributions; tax-free withdrawals	Pre-tax or after-tax (Roth option); taxes due on withdrawals or tax-free if Roth
Employer match	No	Yes (in many plans)
Investment choices	Wide range	Limited by employer’s plan options
Income limits	Yes (phases out for high earners)	No
Required Minimum Distributions (RMDs)	No for Roth IRA	Yes for traditional 401(k)

Which Is Better: IRA or 401(k)?

The best choice depends on your situation:

If your employer offers a match, contributing to your 401(k) up to the match is usually a smart move—it's free money.
If you want broader investment options and potential tax-free withdrawals, a Roth IRA may be preferable.
For higher contribution limits and payroll deductions, a 401(k) is better suited.
If you’re self-employed or don’t have access to a 401(k), an IRA is a great alternative.

Combining Both for Maximum Benefits

Many savers use both accounts to maximize their retirement savings. For example, contribute enough to your 401(k) to get the full employer match, then invest in a Roth IRA for tax diversification and greater investment choices.

Next Steps: Build Your Retirement Plan

Choosing between a Roth IRA vs 401k isn’t one-size-fits-all. Your income, tax situation, and retirement goals all matter. Working with a financial planner can help you create a strategy that fits your unique needs.

Want personalized advice? Schedule a free consultation with Sage Hills Financial