401(k) and IRA Guide

When planning for retirement, two of the most widely used tax-advantaged savings vehicles are 401(k) plans and IRAs. While they share several features, they also differ in key ways. Understanding both can help you align them with your retirement goals.

Tax-advantaged accounts help your savings grow faster by delaying or avoiding taxes on your investment growth, depending on whether you choose a traditional or Roth account structure.

2025 Contribution Limits

Account Type	Contribution Limit	Catch-Up (Age 50+)
401(k)	$23,000	+$7,500
IRA	$7,000	+$1,000

Quick Comparison: 401(k) vs. IRA

Feature	401(k)	IRA
Set Up By	Employer	Individual
Investment Choices	Limited by plan menu	Extensive (funds, stocks, annuities, CDs)
Employer Match	Often available	Not available
Contribution Limits (2025)	$23,000 (+$7,500 age 50+)	$7,000 (+$1,000 age 50+)
Income Restrictions	No (for contributions)	Yes (deductibility or Roth eligibility)

401(k)s, IRAs, and the Retirement Years

As you near retirement, your focus typically shifts from growth to preservation. After years of building savings, it’s important to protect and structure them for income.

If you have funds in a workplace 401(k), consider whether a rollover to an IRA could better support your retirement income strategy. Some investors also allocate a portion to an annuity for income guarantees.

Here are a few reasons why:

• As retirement nears, income planning becomes more important than accumulation.
• There’s often a greater need for predictable income during retirement years.
• Rolling funds to an IRA and allocating to an annuity may offer income guarantees.
• You can reduce your exposure to market volatility on part of your savings.
• The right annuity can help provide consistent monthly income.
• IRAs may offer lower administrative fees compared to some 401(k) plans.
• If a 401(k) has high internal fees, those can continue to erode your balance.

Every retirement strategy should reflect your full financial picture. Speak with a qualified financial professional to evaluate whether this approach fits your situation.

Roth 401(k) & Roth IRA Options

Many 401(k) plans and all IRAs now offer a Roth option. Roth contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free. Roth 401(k)s have the same annual limits as traditional 401(k)s. Roth IRAs are subject to income eligibility, but provide valuable tax diversification for many savers.

401(k) Basics

A 401(k) is an employer-sponsored retirement plan that offers tax advantages. Most participants opt for traditional accounts, which allow for tax-deductible contributions and tax-deferred growth. Roth 401(k)s, where contributions are made with after-tax dollars, are also available.

While primarily used by employees, small business owners can establish specialized 401(k) plans. These options can be complex, so consult with a tax or financial advisor if you’re considering one.

IRA Basics

IRAs, or Individual Retirement Arrangements, are typically not offered through employers—though some employer-sponsored options do exist. Many individuals without access to a 401(k) use an IRA to save for retirement.

Like 401(k)s, IRAs come in traditional and Roth formats and offer tax advantages. Traditional IRAs allow for tax-deferred growth, and depending on income, contributions may be deductible. If you’re self-employed, explore other IRA types with a financial professional.

Annuities in IRAs and 401(k)s

Both 401(k)s and IRAs can include annuities among their investment options. Fixed Index Annuities (FIAs) are a popular choice for those seeking principal protection, growth potential linked to a market index, and guaranteed retirement income—without direct stock market exposure. Fixed annuities provide stable returns with minimal fees, while variable annuities involve market risk and higher costs, and may not be appropriate for all investors seeking stability.

401(k) vs. IRA Benefits

Both account types serve as tax-advantaged “wrappers” for retirement savings, but their benefits differ. See the comparison table below for a side-by-side overview.

401(k) and IRA Comparison Table

Feature	401(k)	IRA
2025 Contribution Limit	$23,000	$7,000
Catch-Up (Age 50+)	+$7,500	+$1,000
Employer Contributions	Yes, up to 6% match	No
Tax Deductible Contributions	Yes	Yes (with income limits)
Investment Flexibility	Limited to plan menu	Wide investment choices
Setup	Employer	Individual or advisor

401(k) benefits include:

• Higher contribution limits than IRAs in 2025
• Catch-up contributions for those 50 or older
• Employer matching options
• Contributions reduce taxable income
• Tax-deferred investment growth
• Some plans allow penalty-free emergency withdrawals under qualifying events

IRA benefits include:

• Lower-cost setup and broad investment flexibility
• Tax-deductible contributions based on income
• Available to individuals, including self-employed and business owners
• Can be opened through banks, brokers, or financial advisors
• May allow penalty-free withdrawals if funds are redeposited within 60 days

Pro Tip: If you have access to both a 401(k) and an IRA, you may be able to maximize your annual retirement savings by contributing to both accounts, subject to IRS limits. This can help you take advantage of higher contribution ceilings, tax diversification, and a wider range of investment choices.

401(k) vs. IRA Cons

No retirement vehicle is without limitations. Here are some of the key drawbacks to keep in mind.

401(k) disadvantages include:

• Fewer investment choices than most IRAs
• Can carry higher administrative or advisory fees
• Performance reporting may be minimal
• Less flexibility in changing investments
• Requires active monitoring by the plan participant
• Early withdrawals may trigger a 10% penalty before age 59½
• Most plans don’t offer guaranteed income options
• Contributions may affect your ability to contribute to an IRA
• Possible plan enrollment waiting periods
• Required minimum distributions (RMDs) apply starting at age 73

IRA disadvantages include:

• Lower annual contribution limits than 401(k)s
• 10% early withdrawal penalty before age 59½
• Catch-up savings are limited compared to 401(k)s
• Deductibility may be reduced by other plan participation
• Roth IRA contributions are income-restricted
• RMDs also apply to traditional IRAs starting at age 73