What Is the Difference Between a 401(k) and an IRA?

A 401(k) is a retirement plan your employer sponsors, and an IRA is an account you open on your own at a bank or brokerage. The core difference between a 401(k) and an IRA comes down to who runs the account, how much you can put in, and how many investment choices you get. Both are designed to help you save for retirement with tax benefits, but the rules around each one are not the same.

This guide walks through what each account is, how they compare side by side, and where people tend to mix them up. It is educational information only, not financial advice. Investing involves risk, including the possible loss of the money you put in.

What a 401(k) actually is

A 401(k) is a workplace retirement plan. Your employer sets it up, picks the menu of investments, and handles the paperwork. You decide how much of each paycheck to contribute, and that money comes out before it hits your bank account. Many employers also add a matching contribution, which means they put in some money of their own when you contribute. That match is one of the features that makes a 401(k) different from an account you open alone.

Because it is tied to a job, a 401(k) travels with your employment, not with you. If you leave, you generally stop contributing to that plan. You can leave the money where it is, move it to a new employer's plan, or roll it into an IRA. The IRS sets an annual limit on employee 401(k) contributions, adjusted most years for inflation, at about $24,500 for 2026, with an extra catch-up amount for people age 50 and older.

What an IRA actually is

An IRA stands for individual retirement arrangement. You open it yourself at a bank, credit union, or brokerage, and you control the investments inside it. There is no employer involved and no match. That independence is the trade-off: you get more say over what you hold, but nobody is adding to your balance on your behalf.

IRAs come in two main tax flavors. A traditional IRA may let you deduct contributions now and pay taxes when you withdraw in retirement. A Roth IRA works the opposite way: you contribute after-tax money, and qualified withdrawals in retirement can be tax-free. The IRS caps combined contributions across all your traditional and Roth IRAs at about $7,500 for 2026, plus a catch-up amount at age 50 and up. That limit is much lower than the 401(k) limit, which is one reason some people use both.

Side-by-side comparison

The table below lines up the features that matter most for a beginner trying to tell these two accounts apart.

One more difference worth knowing: a 401(k) is funded straight from payroll, so the money never sits in your checking account first. An IRA is funded by you, which means you have to move the money yourself, usually by a transfer or deposit from a linked bank account.

Worked example: Maya splits her savings

Maya is 34 and earns $72,000 a year. Her employer offers a 401(k) with a dollar-for-dollar match on the first 4% of pay she contributes. She wants to know how the two accounts would look if she used both.

Step 1: Her match. Four percent of $72,000 is $2,880. If she contributes at least that much, her employer adds $2,880 to her 401(k) for the year. That is money she would not get from an IRA.

Step 2: Her 401(k) contribution. She decides to put in 8% of pay. Eight percent of $72,000 is $5,760. That is well under the $24,500 limit, so no cap issue.

Step 3: Her IRA contribution. She also opens a Roth IRA and contributes $3,000 for the year. That is under the $7,500 combined IRA limit, so she is fine there too.

Step 4: Her total retirement savings for the year. Add it up: $5,760 from her 401(k) plus $2,880 from the match plus $3,000 into the IRA equals $11,640.

Notice that the match alone is $2,880, which is more than half of what she put into the IRA. That is the practical gap between the two accounts. If you want to see how contributions grow over decades, a compound interest calculator can show the math.

How to tell which account you are looking at

The fastest way to tell them apart is to ask who opened it. If the account came through a job and the money comes out of payroll, it is a 401(k) or a similar workplace plan like a 403(b) or 457(b). If you filled out an application at a brokerage and picked your own funds, it is an IRA.

Another clue is the contribution limit. If the annual cap is in the low five figures, you are looking at a workplace plan. If the cap is in the single-digit thousands, it is an IRA. And if there is an employer match listed on your statement, that is a workplace plan feature, since IRAs do not have matches.

Rollovers blur the line a little. When you leave a job, you can move a 401(k) balance into an IRA. After that, the money sits in an IRA and follows IRA rules. The account type changed even though the dollars did not.

What people get wrong about 401(k)s and IRAs

Mistake 1: Assuming the higher limit means the 401(k) is always the better account. The 401(k) limit is much larger, but the investment menu is usually narrow and may carry higher fees than a brokerage IRA. A bigger cap does not automatically mean a better deal.

Mistake 2: Thinking an IRA is only for people who are self-employed. Anyone with earned income can generally open an IRA, whether they also have a 401(k) at work or not. Having a workplace plan does not lock you out of an IRA.

Mistake 3: Forgetting that the IRA limit is combined, not per account. If you have a traditional IRA and a Roth IRA, the $7,500 figure covers both together. Opening a second IRA does not double your limit.

Mistake 4: Confusing a rollover with a contribution. Moving a 401(k) balance into an IRA is a rollover, and it does not count against your annual IRA contribution limit. Only new money you add counts.

Where this leaves you

A 401(k) is a workplace plan with a higher contribution limit and often an employer match, while an IRA is a self-directed account with a lower limit and more investment choices. The two are not rivals; many people use both. The right mix depends on your income, whether your employer matches, and what investments you want to hold. For a closer look at how retirement accounts fit into a broader plan, see the investing hub and the money hub.

Editorial note: Interest rates and economic data can change frequently. Figures in this article are based on the latest publicly available data at the time of publication and should be checked against the cited primary sources for the most current values.