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IRA vs. 401(k): Which retirement plan is right for you?

Young woman signing paperwork at home.
Luis Alvarez/Getty Images

While there are many ways to build your retirement savings so that you can have the post-career life you imagined, two accounts are designed to help you with this goal: an individual retirement account (IRA) and a 401(k).

Each of these savings plans have unique tax considerations, strengths and limitations. Understanding the IRA vs. 401(k) tradeoffs can help you determine which works best for you and which one will allow you to pursue your retirement goals, such as spending more time with family, supporting your community and donating to charities.

To supercharge your savings even more, you can use both types of accounts. In fact, Thrivent's Retirement Readiness Survey* found that among those nearing retirement, 42% intend to rely on a mix of assets such as a 401(k), IRA, personal savings, and Social Security benefits.

In this article, we'll cover:

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What is an IRA?

Individual retirement accounts, or IRAs, are tax-advantaged retirement savings vehicles meant to bolster your current savings with earnings that compound over time. Traditional and Roth are two of the most common types of IRAs.

How does a traditional IRA differ from a Roth IRA?

Traditional IRA is taxed later

A traditional IRA is funded with pretax, or "tax later" dollars. Any taxes you pay are deferred until you begin taking distributions. Your contributions are tax deductible if you and your spouse don't participate in an employer-sponsored plan. If either of you does participate in an employer plan, your contributions are tax deductible as long as your income is below certain thresholds.1

This option may be beneficial if you believe you are currently in your peak earning years and believe you may be in the same or a lower tax bracket in retirement.

Roth IRA is taxed now

A Roth IRA is funded by money that you've already paid taxes on—also known as after-tax dollars—so distributions of your contributions are tax-free at any point. While there is no tax deduction for Roth IRAs, your earnings grow deferred in the account, and you never will pay income taxes on those earnings if you are making a qualified distribution.2

A Roth IRA may be advantageous if you believe you are not in your peak earning years and think you may be in a higher tax bracket in retirement.

What is a 401(k)?

A 401(k) is the most common type of employer-sponsored retirement plan. It helps employees save for and invest in their retirement in a tax-advantaged way.

When you sign up to participate in a 401(k), you opt to have a specific percentage of your paycheck automatically directed into the plan. Your employer has the option to match some or all of your contributions as an employee benefit, helping to give your savings a boost. Over time, your savings will compound and grow tax-deferred.

How does a traditional 401(k) differ from a Roth 401(k)?

Many employers have begun offering Roth 401(k)s, which differ from traditional plans in a major way. Simply put, Roth 401(k)s work in a similar way to Roth IRAs. While you contribute pretax dollars through payroll deductions to a traditional 401(k), your contributions to a Roth 401(k) are made with dollars you've already paid taxed on, so you won't have an additional tax liability when you take distributions.

Additionally, your earnings from a Roth 401(k) will grow tax-free, and if you are making a qualified distribution, you never will pay taxes on those.2

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Woman invest online stocks trading on mobile platform app
Woman invest online stocks trading on mobile platform app

How to invest for retirement

Whether you're just getting started with retirement savings or nearing your retirement years, it's critical to know how to approach long-term investments. Get tips on how to invest for retirement—including investment types, tax-advantaged accounts, and the importance of managing risk.

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What are the differences between an IRA & 401(k)?

Though they are both accounts to help save for retirement, IRAs and 401(k)s differ in seven primary ways:

1. How you access them

IRA are self-directed

If you want to open an IRA, you work directly with a financial institution that offers them, such as a brokerage firm or a bank.

401(k)s are offered through employers only

You only can access a 401(k) through an employer that offers one as a benefit. You then fund it by making contributions through payroll deductions.

2. Eligibility requirements

IRAs require earned income; Roth IRAs have income limits

To contribute to an IRA, you or your spouse must have earned income. This includes wages, salaries, tips, bonuses, commissions and earnings from self-employment. However, Roth IRAs have income limits to participate.

2023 & 2024 Roth IRA income limits to participate

If you make between the maximum modified adjusted gross income (MAGI) listed, you can contribute to a Roth IRA but it will be a reduced amount. If you make equal to or more than the maximum limit listed, you can't contribute anything to a Roth IRA.

Filing status
2023 maximum modified adjusted gross income (MAGI) to contribute to a Roth IRA
2024 maximum modified adjusted gross income (MAGI) to contribute to a Roth IRA
Single or head of household
 $138,000-$153,000
$146,000-$161,000
Married filing jointly
$218,000-$228,000
$230,00-$240,000
Married filing separately
 $0-$10,000
$0-$10,000

401(k)s require employment

You must be working at a company to contribute to a 401(k). Some employers allow new hires to enroll in their plan immediately, but others may require employees to wait up to a year to participate.

3. Contribution limits

The IRS sets contribution limits for retirement plans each year. And, as an additional boost for people age 50 or older, catch-up contributions are able to made beyond the standard limit.

IRAs have much lower contributions limits than 401(k)s.

IRA contribution limits for 2023 & 2024

  • 2023 contribution limit: $6,700
  • 2024 contribution limit: $7,000
  • Catch-up contribution limit: $1,000

401(k) contribution limits for 2023 & 2024

  • 2023 contribution limit: $22,500
  • 2024 contribution limit: $23,000
  • Catch-up contribution limit: $7,500

4. Investment options

While both IRAs and 401(k)s offer professional investment options, IRAs often have greater flexibility.

IRAs have a greater breadth of investment options

An IRA portfolio can include a variety of investments, like stocks, bonds, mutual funds, certificates of deposit (CDs), real-estate investment trusts (REITs) and money market funds.

Most IRAs allow you to choose your investment options, or you can leave the decisions to a professional at the financial institution you choose.

401(k) typically come with pre-selected investments

Portfolio options for a 401(k) generally are limited to the investments the plan provider chooses. These commonly include mutual funds and company stock. (Some plans do enable investors to access a wider variety of choices through a self-directed brokerage account, however.)

5. Option to take loans

Some retirement plans offer loans that account owners can pay back over time.

IRAs don't allow loans

The option to borrow funds and then pay back is not available for IRAs.

401(k)s typically allow loans

Some providers allow 401(k) participants to borrow from their plans, though before doing so consider the full list of benefits and drawbacks: The pros & cons of borrowing from 401(k) plans

6. Distribution rules & requirements

Distribution rules of IRAs and 401(k)s are dependent on if you have a traditional or Roth version:

Traditional IRAs

  • You can withdraw penalty-free as early as age 59½, with your withdrawals taxed at your current income.
  • If you withdraw funds before 59½, you may face a 10% penalty unless you qualify for an exception. Exceptions include to pay health insurance premiums after a job loss, to purchase a first home, to help pay for the birth or adoption of a child, and to help pay qualified education costs for you or a family member. You can view the full list here.

401(k)s

  • You can withdraw penalty-free at age 59½, if you leave your job, or experience a disability. Your withdrawals will be taxed at your current income.
  • If you withdraw funds before 59½, you may face a 10% penalty unless you qualify for an exception.

Roth IRAs & Roth 401(k)s

For both a Roth IRA and a Roth 401(k), withdrawals of contributions are tax and penalty-free at any time. Earnings are tax-free and penalty-free if the account is at least five years old and one of the following requirements is met:

  • You're at least age 59½.
  • You're disabled.
  • The money is being paid to a beneficiary.
  • Up to $10,000 for a first-time home purchase

A Roth 401(k) also offers this perk:

  • You can take a partial distribution that draws from both your contributions and earnings (prorated), unlike a Roth IRA, which draws from your contributions first.

7. Required minimum distributions (RMDs)

An RMD is the minimum amount of money you must withdraw from a tax-deferred retirement plan after you reach a certain age.

Traditional IRAs & 401(k)s have RMDs

Traditional IRAs and 401(k)s will require you to take RMDs and pay taxes on the distribution.

  • If you turn 73 before 2033, your RMD age will be 73.
  • If you turn 74 after 2032, your RMD age will be 75.

If you're still working at your RMD age and your plan allows it, you may be able to delay taking RMDs. The IRS applies a formula to determine the amount of each annual RMD. Additionally, the IRS requires those who own 5% or more of a company to take RMDs once they turn 73. This age increases to 75 in 2033.

Roth accounts do not have RMDs

Roth IRAs do not have RMDs for the IRA account owner, although beneficiaries of a Roth IRA may have specific distribution requirements.

Starting in 2024, there will be no RMD requirement for Roth 401(k)s. Prior to that, these accounts had the same RMD requirement of traditional 401(k)s. 

IRA vs 401(k) at a glance

 
Traditional IRA
Roth IRA
401(k)
Roth 401(k)

How it's offered

Through financial institutions
Through financial institutions
Through an employer
Through an employer

Contribution limit

2023: $6,500;
2024: $7,000

2023: $6,500;
2024: $7,000

2023: $22,500;
2024: $23,000

2023: $22,500;
2024: $23,000

Catch-up contribution limit

$1,000
$1,000
$7,500
$7,500

Employer match available?

No
No
Yes, typically
Yes, typically

Income limit to participate?

No
Yes
No
No
Tax-deductible?

Yes, though deduction may phase out if you or a spouse are covered by a workplace plan

No
No
No
Loans available?
No
No
Yes, typically
Yes, typically
Taxation of withdrawals
Taxed as ordinary income

Withdrawals of contributions are tax-free; qualified withdrawals of earnings are never taxed if certain requirements are met

Taxed as ordinary income

Withdrawals of contributions are tax-free; qualified withdrawals of earnings are never taxed if certain requirements are met
Required minimum distributions (RMDs)

Required between ages 73-75, depending on your birth year

No RMD requirement

Required between ages 73-75, depending on your birth year

No RMD requirements starting in 2024

Is it better to contribute to a 401(k) or IRA?

The answer depends on your financial goals and personal variables, like your age, work status and investment horizon. For example, if you work for a company that offers a 401(k) match, you could earn essentially free money by contributing to a 401(k). Now, if you've changed jobs where you had a 401(k), you may want to consider rolling your account into an IRA.4

Remember that both accounts also can work together. Consider funding an IRA if you've maxed out your 401(k) contributions or met your company match but want to save more for retirement. In addition, owning retirement accounts that are taxed differently, like a 401(k) and a Roth IRA, can help diversify your tax liabilities. Just keep in mind that if you or your spouse contributes to a 401(k) and a traditional IRA at the same time, the deduction you can claim on your federal income tax return may be limited.1

The ins and outs of retirement accounts can be a lot to sort through. For personalized guidance, insight into different savings strategies and setting yourself up for the retirement you envision, connect with a financial advisor.

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*Methodology: This research was conducted in June 2022 among a national sample of 1,500 adults in order to measure their sentiments, financial planning, knowledge, and issues regarding retirement. The interviews were conducted online and the data was broken into three sample groups; Saving, Nearing, and Retired. Results from the full survey have a margin of error of plus or minus 3 percentage points.

1 For 2023, your contribution deduction is reduced if MAGI is between $73,000 and $83,000 on a single return and $116,000 and $136,000 on a joint return. If you're married filing jointly and an active participant in an employer sponsored retirement plan and your spouse is not, the deduction for your spouse's contribution is phased out if MAGI is between $218,000 and $228,000. For 2024, your contribution deduction is reduced if MAGI is between $77,000 and $87,000 on a single return and $123,000 and $143,000 on a joint return. If you're married filing jointly and an active participant in an employer sponsored retirement plan and your spouse is not, the deduction for your spouse's contribution is phased out if MAGI is between $230,000 and $240,000. If you're a married taxpayer who files separately, consult your tax advisor.

2 Distributions of earnings are tax free as long as your Roth IRA or Roth 401(k) is at least five years old and one of the following requirements is met: (1) you are at least age 59½; (2) you are disabled; (3) you are purchasing your first home ($10,000 lifetime maximum); or (4) the money is being paid to a beneficiary.

3 You may contribute to a Roth IRA if your modified adjusted gross income for 2023 is less than $138,000 (single filer) or less than $218,000 (joint filer). Contribution reduced if MAGI is between $138,000 and $153,000 on a 2023 single return and $218,000 and $228,000 on a 2023 joint return. You may contribute to a Roth IRA if your modified adjusted gross income for 2024 is less than $146,000 (single filer) or less than $230,000 (joint filer). Contribution reduced if MAGI is between $146,000 and $161,000 on a 2024 single return and $230,000 and $240,000 on a 2023 joint return. If you are a married taxpayer who files separately, consult your tax professional.

4 There may be benefits to leaving your account in your employer plan, if allowed. You will continue to benefit from tax deferral, there may be investment options unique to your plan, fees and expenses may be lower, plan assets have unlimited protection from creditors under Federal law, there is a possibility for loans, and distributions are penalty free if you terminate service at age 55+. Consult your tax professional prior to requesting a rollover from your employer plan.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

State tax rules may differ from federal rules governing the tax treatment of Roth IRAs and there may be conflicts between federal and state tax treatment of IRA conversions. Consult your tax professional for your state's tax rules.

While diversification can help reduce market risk, it does not eliminate it. Diversification does not assure a profit or protect against loss in a declining market.
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