Two accounts, two starting points
A 401(k) and an individual retirement account (IRA) are both tax-advantaged ways to save for retirement, but they originate differently. A 401(k) is set up and administered by an employer, with contributions typically deducted directly from a paycheck. An IRA is opened by an individual directly with a brokerage or financial institution, independent of any employer.
That structural difference shapes almost everything else about how each account works — from how much can go in each year, to who chooses the investment options, to what happens when someone changes jobs.
How a 401(k) contribution flows
When an employee elects to contribute to a 401(k), a percentage of each paycheck is withheld before it's deposited into the employee's bank account and instead routed to the retirement plan. Many employers also offer a matching contribution — for example, matching 50 cents for every dollar an employee contributes, up to a set percentage of salary. That match is effectively additional compensation deposited straight into the retirement account.
How an IRA contribution flows
An IRA doesn't involve an employer at all. An individual transfers money — from a bank account, for instance — directly into the IRA, up to the annual contribution limit. There's no automatic paycheck deduction and no employer match, since the account isn't tied to a job.
Approximate 2026 contribution limits
Contribution limits for both account types are set by the IRS and are adjusted periodically for inflation. The figures below are approximate for 2026 and are illustrative rather than official guidance — actual limits should be confirmed with the IRS or a plan administrator each year.
| Account type | Approximate 2026 limit (under 50) | Approximate catch-up (50+) |
|---|---|---|
| 401(k) employee contribution | ~$24,000 | ~$8,000 additional |
| Traditional or Roth IRA | ~$7,500 | ~$1,100 additional |
A 401(k)'s limit is considerably higher than an IRA's, which is one reason many savers use both: contributing enough to a 401(k) to capture any employer match, and using an IRA as a separate, individually controlled account.
Employer match doesn't count against the employee limit
An employer's matching contribution is typically tracked separately from the employee's own contribution limit, subject to an overall combined cap on total contributions to the plan from all sources. That combined limit is also adjusted periodically by the IRS.
Tax treatment: traditional and Roth versions exist in both
Both 401(k)s and IRAs commonly come in two tax flavors:
- Traditional: contributions may reduce taxable income in the year they're made; withdrawals in retirement are generally taxed as ordinary income.
- Roth: contributions are made with after-tax dollars; qualified withdrawals in retirement are generally not taxed.
Some workplace plans offer only a traditional 401(k) option, others offer both traditional and Roth, and a smaller number offer neither in a way that fits every worker's situation. IRAs commonly offer a choice between traditional and Roth, though Roth IRA eligibility can be limited at higher income levels.
Investment choices differ too
A 401(k) typically offers a curated, limited menu of investment options chosen by the plan administrator — often a set of mutual funds or target-date funds. An IRA, opened directly with a brokerage, usually offers a much wider range of investment choices, including individual stocks, bonds, and a broader universe of funds.
What happens when someone changes jobs
A 401(k) is tied to the employer that sponsors it. When someone leaves that job, they generally have a few options for the balance:
- Leave it in the former employer's plan, if permitted
- Roll it into a new employer's 401(k), if the new plan accepts rollovers
- Roll it into an IRA
- Cash it out, which can trigger taxes and penalties depending on age
An IRA, by contrast, isn't tied to any employer, so it stays in place regardless of job changes.
Required minimum distributions
Both account types are generally subject to required minimum distributions (RMDs) beginning at an age set by law, with Roth IRAs typically not subject to RMDs during the original owner's lifetime under current rules. RMD ages and rules have changed in recent years, so account holders approaching that stage typically confirm current requirements rather than relying on older figures.
Key takeaways
- A 401(k) is employer-sponsored with payroll-deducted contributions and often an employer match; an IRA is opened individually.
- Approximate 2026 contribution limits are meaningfully higher for a 401(k) than for an IRA.
- Both account types typically offer traditional and Roth versions with different tax treatment.
- 401(k) investment menus are usually narrower than the options available inside an IRA.
- A 401(k) balance from a former job can generally be left in place, rolled over, or in some cases cashed out.
