IRA vs. Roth IRA vs. 401(k) Explained: What’s the Difference and Which is Right for You?

Individual retirement accounts (IRAs) and 401(k) plans share many similarities, but each type of retirement plan comes with its own set of tax-advantaged perks. Together, traditional IRAs, Roth IRAs, and 401(k) accounts offer different retirement savings options, depending on your income, employment, and long-term tax strategy.

So, how do you know whether to put your money in a traditional IRA, a Roth IRA, or a 401(k) account? Let’s walk through how each one works, where they’re similar, and how they differ, especially when it comes to income tax and tax benefits.

What are the different types of retirement accounts?

A retirement account is any financial account that gives you tax benefits to save money for retirement. These accounts are usually long-term investment accounts that grow either tax-deferred or tax-free. The most common types that we will cover include:

Traditional IRA
Roth IRA
Traditional 401(k) (offered by an employer)

You might also hear about Roth 401(k)s, SIMPLE IRAs, and SEP IRAs — but for this article, we’re focusing on the three listed above: traditional IRA, Roth IRA, and traditional 401(k).

Traditional IRA vs. Roth IRA vs. 401(k): The basics

Let’s look at what sets these retirement plans apart, starting with the two types of IRAs.

What is a traditional IRA vs Roth IRA?

Traditional IRA

Contributions to traditional accounts are made with pre-tax dollars (meaning they are typically tax-deductible).
Your money grows tax-deferred until you withdraw it.
You’ll pay income tax on withdrawals in retirement.
You must begin taking required minimum distributions (RMDs) starting at age 73 (or 72 if you were born before July 1, 1949).
A 10% early withdrawal penalty applies if you take distributions before age 59 ½.
The 2025 contribution limit is $7,000 (or $8,000 if age 50 or older — called catch-up contributions).
Read our traditional IRA guide.

Roth IRA

Contributions are made with after-tax dollars, so you won’t get an upfront tax deduction.
Money grows tax-free, and qualified withdrawals are also tax-free.
No RMDs during your lifetime, which can be a nice perk if you want to keep the money growing longer. However, RMD rules still apply to any beneficiaries who may inherit your IRA.
You can withdraw contributions (not earnings) at any time penalty-free.
Income limits apply (more on this below).
The 2025 contribution limit is $7,000 (or $8,000 if age 50 or older).
Read our Roth IRA guide.

How is a 401(k) different from an IRA?

401(k) plan

Offered by employers and funded through payroll deductions.
Contributions are made with pre-tax dollars, reducing your taxable income now.
Earnings grow tax-deferred until retirement.
Withdrawals are taxed as income at your normal income tax rate.
RMDs begin at age 73.
The 2025 contribution limit is $23,500 (or $31,000 if age 50 or older).
Read our 401(k) guide.

Quick comparison: Difference between IRA, Roth IRA, and 401(k)

Feature	Traditional IRA	Roth IRA	401(k)
Tax-deductible contributions	Yes (if eligible)	No	Contributions are made pre-tax, reducing your taxable income that way
Tax-free withdrawals	No	Yes (for qualified distributions)	No
RMDs required	Yes	No	Yes
Income limits to contribute	No	Yes	No (but highly compensated employee rules may apply)
Best for	Lower income now	Higher income later in retirement	Employer match & high annual contribution limits
Tax year 2025 contribution limit	$7,000 ($8,000 if 50+)	$7,000 ($8,000 if 50+)	$23,500 ($31,000 if 50+)

Retirement plan limitations explained

2025 income limits for Roth IRA contributions

Your eligibility to contribute to a Roth IRA starts to phase out at certain income levels, based on your modified adjusted gross income (MAGI) and filing status:

Single, head of household, and married filing separately (and you didn’t live with your spouse at all during the year):
- You can make a full contribution if your MAGI is less than $150,000.
- Reduced contributions are allowed until your MAGI reaches $165,000.
- After that, no Roth IRA contributions are allowed.
Married filing jointly or surviving spouse:
- You can make a full contribution if your MAGI is less than $236,000.
- Reduced contributions are allowed until your MAGI reaches $246,000.
- After that, no Roth contributions are allowed.

Note: If you are married filing separately and lived with your spouse at any time during the year, you can only make reduced contributions, and only if your MAGI is under $10,000. No contributions are allowed if your income exceeds $10,000.

2025 deduction limits for traditional IRA contributions

While there are no income limits for contributing to a traditional IRA, if you (or your spouse) are covered by an employer-sponsored retirement plan, your ability to deduct traditional IRA contributions may be limited based on your income level and filing status.

You can deduct your entire 2025 IRA contribution if your MAGI falls within these limits based on your filing status:

Single or head of household (covered by work retirement plan): $79,000 or less
Married filing jointly (both covered by work plan): $126,000 or less
Married filing jointly (one spouse covered): $236,000 or less
If neither you nor your spouse can access a workplace retirement plan, your traditional IRA contribution is fully deductible regardless of income.

See our traditional IRA guide for more detailed information about the IRA deduction phase-out ranges.

2025 401(k) contribution limits

There are no income limits to contribute to a 401(k), making it a great option for high earners. But just like an IRA, there are limits to how much you can contribute per year.

Here are the 401(k) contribution limits for 2025:

If you are under 50 years old, you can contribute $23,500 per year.
If you are 50 or older, you can contribute $31,000 (including an additional $7,500 catch-up contribution).

These contribution limits are separate from what you can put into an IRA, giving you even more room to boost your retirement savings if you’re eligible for both types of retirement plans.

Tax benefits of retirement plans

There are some important factors to consider when it comes to Roth IRA versus traditional IRA advantages, and how they both compare with a 401(k) plan. Here’s a quick breakdown of the tax benefits of each type:

Traditional IRA tax benefits

Deducting your contributions lowers your current taxable income.
If you are right on the edge between two tax brackets, contributing to a traditional IRA could push you into a lower tax bracket or help you qualify for other tax credits (like the Earned Income Tax Credit).
Tax-deferred growth means you pay taxes later when you withdraw in retirement.
You can open one on your own, no employer needed, making an IRA perfect for freelancers, gig workers, and the self-employed.

Roth IRA tax benefits

When you contribute, you don’t get a tax break upfront, but your money grows tax-free.
In retirement, qualified withdrawals (including earnings) are 100% tax-free.
This can be a big benefit if you expect your tax rate to be higher in retirement.
Like a traditional IRA, you don’t need an employer to open a Roth IRA, making it appealing to self-employed people.

401(k) tax benefits

Contributions reduce your taxable income in the year you contribute.
If you are on the edge between two tax brackets, making pre-tax 401(k) contributions could lower your tax rate or help you qualify for additional tax credits.
You can potentially take advantage of matching employer contributions (essentially free money!).
Annual contribution limits are higher than those for IRAs.
Tax-deferred growth means you pay taxes later when you withdraw in retirement.

Strategic tips for choosing between IRAs vs. 401(k)s

Choosing which retirement plan works best for you will depend on your individual situation and financial goals, but here are some helpful pointers to keep in mind:

Use your 401(k) if you get matching contributions from your employer. That’s an automatic return on your investment.
Use a Roth IRA if you expect to be in a higher tax bracket later when you retire.
Use a traditional IRA or 401(k) if you want to lower your taxable income now.
Split your strategy. You can contribute to both a 401(k) and an IRA in the same year. Depending on your situation, you may also benefit from splitting contributions between a traditional and Roth IRA.
Watch the income limits if you plan to contribute to a Roth IRA or take a tax deduction for a traditional IRA. Over-contributing can lead to penalties.
Start early and contribute consistently. Compounding interest over time = more growth, no matter what type of investment account you have.

How to open or contribute to an IRA and 401(k)

Account	How to open	How to fund
Traditional and Roth IRAs	Bank, broker, or financial advisor.Your employer, if offered (usually a SIMPLE IRA or SEP IRA for small businesses).	Direct contributions from your bank account.A rollover from a 401(k), 403(b), or another IRA account.
401(k) plans	Through your employer.	Payroll deductions only.

FAQs

Can I contribute to both a traditional and Roth IRA in the same year?

Yes, but your total contributions across both IRAs can’t exceed the annual limit ($7,000 for 2025, or $8,000 if you’re 50+).

What happens if I contribute too much to my IRA?

If you contribute more than the annual limit to an IRA, you may owe a 6% excess contribution penalty. But don’t panic just yet — you can avoid penalties by removing the extra amount (and any interest or other income it earned) before the tax filing deadline.

If you contribute too much to a Roth IRA due to your MAGI exceeding the limit, you can transfer the excess contributions to a traditional IRA. This can help you avoid penalties for excess contributions if you do so before the tax deadline.

What happens if I contribute too much to my 401(k)?

Excess contributions tend to happen less often with a 401(k) — typically, contributions stop automatically when you hit the annual limit through your payroll deductions. However, if you find yourself with excess 401(k) contributions, contact your plan administrator immediately to correct it. Any excess amount will be taxed as ordinary income and may also be subject to a 10% penalty if you are under age 59 ½.

Check out our IRA excess contributions and excess 401(k) contributions support pages for more info on this topic.

Do IRAs come with any age limits?

There’s currently no age limit for making IRA contributions, but you must have earned income.

What’s the difference between tax-deferred and tax-free growth?

Tax-deferred growth means you delay paying taxes until withdrawal (traditional IRA and 401(k) plan).

Tax-free growth means you never pay taxes on qualified withdrawals (Roth IRA).

Can I use my IRA or 401(k) for medical expenses or other early withdrawals?

Yes, in some instances, you may be able to take early distributions without triggering the 10% penalty (taxes may still apply). Some examples that may qualify you for an exception include unreimbursed medical expenses, higher education expenses, or buying your first home.

For more information and to ensure you are following withdrawal rules, check out exceptions to tax on early distributions on irs.gov.

What is a Roth 401(k) vs. Roth IRA?

A Roth 401(k) is a workplace-based retirement plan that some employers offer. It shares some similarities with Roth IRAs, but these Roth accounts have a few key differences.

Roth IRA vs. 401(k) comparison:
• A Roth 401(k) may come with an employer match, while Roth IRAs do not.
• Roth IRAs have income limits for eligibility, while Roth 401(k)s do not.
• You often get more control over your investment options with a Roth IRA (anything from stocks, bonds, mutual funds, etc.), depending on your chosen provider.
• Roth 401(k) plans have higher contribution limits than Roth IRAs.

Do Roth IRA contributions reduce taxable income?

Nope, Roth IRA contributions are always made with after-tax dollars, so you won’t get a tax deduction now, but your future withdrawals will be tax-free.

Which retirement account should I start with?

If your employer offers a 401(k) with a match, start there. After that, consider a Roth or traditional IRA depending on your income and tax goals.

Can I roll over money between these accounts?

Yes — you can roll a 401(k) into a traditional IRA when you leave a job, and you can move funds between a traditional IRA and a Roth IRA (though converting a traditional to Roth may trigger taxes). Read up on the IRS rollover rules if you have questions!

The bottom line

When it comes to saving for retirement, there’s no one-size-fits-all solution. But knowing the difference between a traditional IRA, Roth IRA, and 401(k) can help you choose the mix that fits your income, job situation, and financial goals. Even small, steady contributions can add up over time, especially if you’re taking full advantage of each retirement plan’s tax benefits.

Need help figuring out how your retirement contributions affect your taxes? TaxAct® can help with everything from calculating your IRA deduction to checking your Roth eligibility and reporting distributions taken from your IRA or 401(k) plan. We’ll walk you through the entire reporting process step by step.

This article is for informational purposes only and not legal or financial advice.

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Meghen Ponder: Meghen Ponder is an editorial writer for TaxAct who specializes in writing content about finance and taxes. She enjoys decoding the intricacies of the tax world and helping others answer their tax questions.