401(k) vs IRA
Employer Plan vs Individual Retirement Account Comparison
Both 401(k) plans and IRAs are powerful retirement savings vehicles, but they have important differences in contribution limits, investment options, and tax treatment. Most financial advisors recommend using both strategically. Here's how they compare.
Side-by-Side Comparison
| Feature | 401(k) | IRA |
|---|---|---|
| 2025 Contribution Limit | $23,500 ($31,000 if 50+) | $7,000 ($8,000 if 50+) |
| Employer Match | Often available (potentially additional retirement contributions when matched) | Not available |
| Investment Options | Limited to plan menu | Virtually unlimited |
| Fees | Plan-level fees (often higher) | You choose your custodian/funds |
| Roth Option Available | Yes (Roth 401k) | Yes (Roth IRA) |
| Loan Provision | Many plans allow loans | No loans allowed |
| Creditor Protection | Full ERISA protection | Up to $1.5M in bankruptcy |
| RMDs | Required at 73 (unless still working) | Traditional: 73. Roth IRA: None |
| Early Withdrawal Penalty | 10% before 59½ (Rule of 55 exception) | 10% before 59½ (Roth contributions exempt) |
| Rollover Options | Can roll to IRA or new employer plan | Can roll to another IRA |
| Income Limits | None for participation | Roth IRA has income limits |
| Contribution Flexibility | Payroll deduction only | Contribute anytime during year |
Key Insight
A commonly discussed sequencing framework is: 1) Contribute to your 401(k) at least up to the employer match (capturing any matching contribution available under the plan; matches are subject to vesting and contribution limits), 2) Contribute to a Roth IRA up to the applicable limit, then 3) Increase 401(k) contributions toward the IRS limit. This framework is a starting point for some households; the right answer for a given household depends on tax bracket, expected retirement bracket, available cash flow, eligibility (income phase-outs apply to Roth IRA contributions and Traditional IRA deductions when covered by a workplace plan), and goals.
"I always tell clients: never leave employer match money on the table; capturing your full match is one of the highest-value steps in retirement savings. Match benefits are subject to your plan's vesting schedule and contribution terms, and contributions are then invested in plan options subject to market risk. After that, a Roth IRA gives you flexibility and tax diversification that a 401(k) alone can't provide."
Brett R. Henderson
Fiduciary Financial Advisor, SWE90
When to Choose Each Option
Prioritize 401(k) If
- Your employer offers a generous match
- You want to maximize total retirement savings ($23,500+)
- You value automatic payroll deductions
- You need ERISA creditor protection
- Your plan has good, low-cost fund options
Prioritize IRA If
- Your 401(k) has poor or expensive fund options
- You want full control over investments
- You want access to Roth IRA benefits (no RMDs, tax-free growth)
- Your employer doesn't offer a match
- You're self-employed (consider SEP/SIMPLE IRA)
Frequently Asked Questions
Should I contribute to a 401(k) or IRA first?
A commonly discussed framework is: 1) 401(k) up to the employer match (subject to vesting and limits), 2) Roth IRA to the applicable limit, 3) Increase 401(k) contributions toward the IRS limit. The right answer depends on each household's tax bracket, expected retirement bracket, cash flow, and eligibility (Roth IRA income phase-outs apply).
Can I have both a 401(k) and an IRA?
Yes. You can contribute to both, though your Traditional IRA deduction may be limited if you also have a 401(k) and your income exceeds certain thresholds.
What happens to my 401(k) when I leave a job?
You can leave it in the old plan, roll it to your new employer's plan, roll it into an IRA, or cash it out (not recommended due to taxes and penalties).
Need Personalized Guidance?
Our fiduciary advisors can help you determine which option is best for your specific situation.
Schedule no-obligation consultation