There are lots of ways to save for retirement, but many people turn to the two main types of retirement plans: 401(k)s and IRAs. Here’s how they’re alike—and different.
Quick takeaways
- Both traditional IRAs and 401(k)s offer pre-tax benefits by reducing your taxable income.
- A 401(k) is provided by an employer, while a traditional IRA is created by you and travels with you, no matter your job.
- Key differences in a 401(k) and traditional IRA include contribution limits and investment options.
Learning (and understanding) all the terms related to retirement can feel overwhelming. A good place to start? The basics.
When it comes to retirement accounts, that means tackling the differences (and similarities) between the most common types of retirement plans: employer-sponsored plans like 401(k)s and traditional individual retirement accounts (IRAs).
The short answer? No. But the more nuanced answer is, 401(k) and traditional IRA accounts share some similarities. For starters, both are accounts that millions of people use to save for retirement. Contributions are flexible; you can make a one-time contribution to either, or you can set up ongoing contributions.
And both 401(k)s and traditional IRAs have some similar tax benefits and obligations. The two accounts have the potential to lower your taxable income because contributions are made with pre-tax dollars. Instead, you pay taxes on both earnings and contributions in retirement.
Most of the time, those funds are part of a retirement income strategy for people; they start withdrawals when they’re done with work. In general, if you make a withdrawal before age 59½, you’ll be subject to penalties on IRAs and 401(k)s, except in some specific instances. In addition, you must begin making what are called required minimum distributions from both accounts by age 72 (if you were born in 1950 or earlier), 73 (if you were born from 1951-1959), or 75 (if you were born in 1960 or later).
While the end goal—saving for retirement—is the same for both 401(k)s and traditional IRAs, there are some key differences. The biggest is how you create each account: a 401(k) is through a workplace, while anyone can set up a traditional IRA on their own.
| Differences | 401(k) | Traditional IRA |
|---|---|---|
| Access and set up | Provided by an employer | Anyone can open one |
| How you save | Payroll deductions; employer match if available | Contributions made by you |
| Investment options | Up to an employer | May have more investment options |
| Contribution limits | $23,500 for 2025 | $7,000 across all IRAs (this includes Roth IRAs, accounts creates with post-tax dollars) |
| Catch-up contributions (extra funds to help you boost retirement savings after you reach a certain age) | Ages 50-59, >64: $7,500; ages 60-63, $11,250 | Age 50+: $1,000 across all IRAs and Roth IRAs |
| Match | Employer may match up to a certain percentage of your contribution | No employer match |
| Rollovers (moving funds from one account into another retirement savings account) | Rollover may be required when leaving a job | Can consolidate funds from old 401(k)s or other IRAs |
| When you leave a job | Can roll over 401(k) savings into an IRA or 401(k) at a new employer (if available; Principal account holders: check your rollover options) | No effect; an IRA belongs to you and moves with you, regardless of employment |
If your budget allows, you can save in both a 401(k) and a traditional IRA. “The overarching goal is to save as much as you can, in as many ways as you can, so you can make the most of your years in retirement,” says Heather Winston, financial professional and product director for Retirement and Income Solutions at Principal®.
Diversifying your retirement savings options gives you more ways to help develop a robust retirement income plan, too.
If you have a retirement account, putting away a little more each year is one way to help boost your savings rate without much impact on your daily budget. Log in to your Principal account to see how much you’re saving. Don’t have an employer-sponsored retirement account? We can help you set up your own retirement savings.
