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What's the difference between a 401K and an IRA?

Everyone knows that saving for retirement is an important financial goal. But it’s not always easy to understand exactly what your options are, especially with so many acronyms out there – like 401K, 403(b), IRA and TSP, just to name a few. What do they all mean and how do they differ? We’re here to set the record straight.

401Ks and Other Employer-Sponsored Retirement Plans

A 401K is a retirement plan offered by employers to their employees. Variations of the 401K include the 403(b), which is often offered by public schools and other non-profit organizations instead of a 401K, and a TSP (Thrift Savings Plan), offered by the Federal government to military service members and other federal employees.

These 401K, 403(b) and TSP plans work similarly. Employees can elect to set aside a certain percentage of their pre-tax income to contribute to their retirement account. Many employers match this amount up to a certain percentage. Then the employee selects from a series of pre-defined investment options, and the money invested grows tax-free until the employee retires and begins making withdrawals.*

A variation of the traditional 401K is a Roth 401K. This main difference between a traditional 401K and a Roth 401K is that a Roth has income limits and contributions are made after-tax, but qualified withdrawals are tax-free.*

In 2021, employees under 50 are allowed to contribute up to $19,500 into a 401K or 403(b), while those over 50 can contribute an additional $6,500 for a total of $26,000.


An IRA (individual retirement account) is a retirement account you can choose to open without any employer involvement. IRAs are offered by many credit unions, banks, and investment and brokerage firms. Many offer a larger range of investment options to choose from compared to an employer-sponsored plan. Like 401Ks, contributions to traditional IRAs are often tax-deductible, and the money invested grows tax-free until you retire and begin making withdrawals.*

There’s also a Roth version of the IRA, where contributions are not tax deductible, but qualified withdrawals are tax-free.* Just like Roth 401Ks, there are income limits on contributing to a Roth IRA.

In addition to not being sponsored by an employer or eligible for an employer match, the contribution limits for IRAs are much lower than employer-sponsored plans, maxing out at $6,000 for those under 50 and $7,000 for those 50 and older in 2021.

Deciding between a 401k and an IRA isn’t necessarily an either-or situation. You can choose to have both, though there may be certain income limits that affect the tax deductibility of your contributions.*

Want to learn more about saving for retirement?

Check out our guide to Maximizing Your Retirement Plan, or sign up for one of our upcoming free virtual financial workshops, where you’ll get expert advice right from the comfort of your couch!