Retirement accounts offer tax advantages designed to encourage long-term saving, but the rules differ depending on the account type. Two of the most common in the U.S. are the employer-sponsored 401(k) and the individually opened IRA (Individual Retirement Account).
What a 401(k) is
A 401(k) is a retirement account offered through an employer, funded through payroll deductions. Contributions are commonly made pre-tax (traditional 401(k)), reducing taxable income in the year they're made, with taxes owed upon withdrawal in retirement — though many employers also offer a Roth 401(k) option, funded with after-tax dollars, where qualified withdrawals in retirement are tax-free. A key feature of many 401(k) plans is an employer match: some employers contribute additional money based on how much you contribute yourself, which is effectively additional compensation for participating.
For 2026, the employee contribution limit for a 401(k) is $24,500, up from $23,500 in 2025. Workers aged 50 and older can make an additional catch-up contribution of $8,000, and those aged 60–63 can make a larger "super catch-up" contribution of $11,250 under recent rule changes. The combined employee-and-employer contribution cap for 2026 is $72,000.
What an IRA is
An IRA is opened individually, independent of an employer, through a brokerage or financial institution. Like a 401(k), it comes in traditional (pre-tax contributions, taxed on withdrawal) and Roth (after-tax contributions, tax-free qualified withdrawals) versions. IRAs are generally more flexible in terms of investment choices than a typical employer 401(k) plan, since you're selecting a provider yourself rather than being limited to your employer's plan menu.
For 2026, the IRA contribution limit (combined across traditional and Roth IRAs) is $7,500, up from $7,000 in 2025, with an additional $1,100 catch-up contribution available for those 50 and older, bringing their total to $8,600. Roth IRA contributions are also subject to income limits that phase out eligibility above certain thresholds.
Key differences at a glance
- Access: a 401(k) requires an employer offering one; an IRA can be opened independently by almost anyone with earned income.
- Contribution limits: 401(k) limits are substantially higher than IRA limits.
- Investment options: IRAs typically offer a broader selection than a given employer's 401(k) plan.
- Employer match: only available through a 401(k), and generally worth prioritizing up to the match amount, since it's effectively free money.
A common starting approach
A widely referenced (though not universal) approach is to first contribute enough to a 401(k) to capture the full employer match if one is offered, then consider contributing to an IRA for its broader investment flexibility, and finally return to increasing 401(k) contributions further if there's capacity to save more. This isn't a one-size-fits-all rule — the right approach depends on your specific plan options, tax situation, and goals — but it's a reasonable starting framework for many people.
