How Does a 401(k) Differ from an Individual Retirement Account (IRA)?

When it comes to planning for retirement, it can all seem very confusing. It’s difficult to know what plan is best for you or what steps you need to start taking. Luckily, there are services and financial advisors set up to help you sift through the confusion and find the best method for you. Two of these services are 401K and individual retirement accounts. Learn more about what each of these services provides to decide which suits your retirement plan best.

What is a 401(k)?

A 401(k) is a retirement plan that is an employee-sponsored service offered in the US. The employer will set a percentage of your income to be automatically withdrawn from each paycheck and invested in your retirement account. This investment plan comes with various tax benefits and allows you to save for your future. 

What is an IRA?

An Individual Retirement Account- or IRA- is set up, managed, and chosen by yourself. How much money and investment you put into it is entirely up to you. These accounts are set up at various financial institutions with tax-free growth or on a tax-deferred basis. Simply put, these accounts can allow you to delay paying taxes until the money is withdrawn. 

Differences Between 401(k) and IRA?

While both offer services that can help provide income during retirement, each plan is established and administered under different rules. 401(k)s are provided by an employer. The employer is usually the one who sets up the account, fees, and investment flexibility options. IRAs on the other hand, are a personal savings plan. This means that you are in charge of managing and investing in any way you see fit. Some other differences between 401(k) and IRA include: 

Contribution Limits

There are limits to how much an employer or individual can contribute to an investment retirement plan each year. The limits differ depending on the type of plan it is and the agreement between each party involved. The contribution limit in 2023 for a 401(k) is around $22,500 or $30,000 if you are older than 50. For IRAs, however, the annual contribution limit is $6,500 or $7,500.

Employer Match

Employer matching means that the amount your employer is contributing to your retirement plan is based on the contributions you are making to the investment plan. For a 401(k) typically, this means making an employee match of 3-6%. With IRAs, it works a little differently. While IRAs are run individually, an employer can make a contribution on your behalf. This contribution is usually also around 3%. These contributions can also be seen via salary deductions as well.

Withdrawal Rules

With both investment plans, certain guidelines apply when it comes to withdrawing money. Generally, if you take a distribution from a 401(k) or an IRA before turning  59 and a half years old, it can result in regular income tax on the taxable amount of your withdrawal along with a 10% federal penalty tax. While there are some exceptions, it’s usually best to refrain from tapping into any retirement money too early. These withdrawal rules are to encourage long-term participation in employer-sponsored retirement plans. 

Advantages of a 401(k)?

401(k)s can offer employees a lot of benefits, including tax breaks and free growth, employer matches, and greater flexibility in contributions. This retirement plan allows for contributions made to the 401(k) to be taken directly from your account before federal income taxes, which can be a great tax advantage. Investment payments can also be made automatically, making it easier and more convenient to save money over a long period of time. Overall, this retirement savings plan can provide beneficial tax advantages while still remaining convenient.

Advantages of an IRA?

It can pay to invest in an IRA when you’re trying to accumulate money for retirement. By giving you tax-free growth or tax-deferred benefits, this type of plan can give your money the opportunity to accumulate over the years. As IRAs are run individually,  there is much more flexibility involved than with other investment retirement plans. You get to decide how much you contribute, giving you the freedom to decide how much money you invest from year to year. Even better, your contributions might also count as tax-deductible, depending on your chosen IRA plan. 

Choosing between 401(k) and IRA

So in what way does a 401(k) differ from an Individual Retirement Account (IRA)? Well, both 401(k)s and IRAs have their pros and cons, so it can be tricky to decide which one suits you better. If you’re looking for higher contribution limits, 401(k)s are known for allowing you to add much more to your retirement savings over time than an IRA. On the other hand, IRAs can be started on your own without an employer. If you are self-employed or your work doesn’t offer a retirement plan- getting an IRA can seem to make much more sense for your lifestyle. IRAs also provide a sense of freedom and flexibility. This type of retirement plan often has lower fees and additional payments than 401(k)s. Analyze your financial situation to determine whether an IRA or 401(k)  might be best suited for you. 

Using both 401(k)s and IRAs for Your Retirement Strategy

Instead of choosing between one or the other, some individuals have opted to have both plans at the same time. Having an IRA in addition to a 401(k) can not only give you the ability to save more but may also give you more investment choices to go along with your employer-sponsored plan. As long as you stay within both accounts’ contribution limitations, you can potentially save even more tax-deferred income for retirement. 

If you’re looking into getting one or multiple investing retirement plans, it can be a good investment to reach out to a financial advisor for help. Here at Oxford Advisory Group, we are dedicated to helping you find the retirement strategy that suits your needs and income. To learn more, reach out to us at or give us a call at 407-495-2004.


This report was prepared by Oxford Wealth Group, LLC, a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Form ADV Part 2A & 2B can be obtained by visiting and searching for our firm name.  Neither the information nor any opinion expressed it so be construed as a solicitation to buy or sell a security of personalized investment, tax, or legal advice.

This is prepared for informational purposes only. It does not address specific investment objectives, or the financial situation, and the particular needs of any person who may receive this report.

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