401(k) vs IRA

Employer-based vs individual accounts
tl;drA 401(k) is a workplace retirement account that employers offer to employees. An IRA is a retirement account that individuals open themselves.

What's the difference between a 401(k) and an IRA?

Both 401(k)s and IRAs are retirement accounts. The main difference is that 401(k)s come from employers, so if you are a freelancer, contractor, or self-employed, then you probably don’t have the option to contribute to a 401(k). Another difference is that 401(k)s let you contribute more money to them each year.

The contribution limits are outlined in the table below:

Limit$6,000$61,000 or 25% of income$20,500
Limit if over 50$7,000$61,000 or 25% of income$26,000

If you have the ability to contribute to a 401(k), especially if your employer will match any of your contributions, then it’s a good idea to maximize your contributions.

In general, you’re also allowed to contribute to both your 401(k) and an IRA, so you can save even more money than the contribution limit for only one type of account. If you don’t have a 401(k) available to you, then you can still contribute to both a SEP IRA and a Roth IRA, for example.