IRAs and 401(k)s are two of the most popular retirement accounts in the United States. Nearly 65 million people own IRAs, according to the Tax Policy Center, and 34.6 percent of working adults have a 401(k), according to the Census Bureau.
There’s a good reason why that’s the case, said Scott Maurer, vice president of sales at Advanta IRA.
“The tax advantages associated with IRAs and 401(k)s is what makes them powerful tools when saving for retirement,” Maurer told The Independent in an email.
“Both IRAs and 401(k)s give an individual the ability to invest a certain amount of money that is allowed to create investment returns that are tax deferred. This tax deferral creates an environment in which the invested money can compound faster.”
Knowing how these two accounts work can help you leverage the benefits IRAs and 401(k)s offer.
Contribution callouts
IRAs and 401(k)s have special rules for how much you can contribute to your accounts each year. The Internal Revenue Service tends to increase the limit every year based on several factors, such as cost-of-living increases, according to the IRS.
For 2026, the maximum amount of money you can put in IRAs and 401(k)s is, according to the IRS:
- IRA: $7,500
- 401(k): $24,500
There are exceptions to those limits, though. Those 50 years and older have a higher contribution limit they can use to “catch up” for contributions they didn’t make in the past.
Catch-up limits
In 2026, the 401(k) catch-up limit is $8,600 for IRAs and and $32,500 for 401(k)s, according to the IRS, with one exception - those aged 60 to 63 get a catch-up limit of $35,750, the IRS noted.
If someone contributes more than the IRA or 401(k) limit in a given year, they must take out their original contribution and any gains on that money by tax day (usually April 15) or face a penalty, said certified financial planner Trent Von Ahsen, managing partner at investment firm Cedar Point Capital Partners.
“If the limits for either IRA or 401k are exceeded, the excess contributions [or] deferrals must be withdrawn (plus any investment gain) by the applicable IRS filing deadline to avoid a 6 [percent] per year penalty,” Ahsen said.
Employer matching
While IRAs and 401(k)s have a lot in common, there’s one key difference: employers typically match 401(k) contributions up to a certain percentage.
If you contribute $10,000 in a year, an employer with a 5-percent match would contribute $500. Employer matches aren’t as common with IRAs. They’re typically found with a special account called a SIMPLE IRA, according to Fidelity.
Withdrawal wisdom
Like contributions, IRA and 401(k) withdrawals have certain rules for how much you can withdraw and when.
The standard minimum age for 401(k) and traditional IRA withdrawals is 59 ½, according to the IRS. Money you take out before that triggers a 10 percent penalty on the amount you take out.
Roth IRAs have different rules. First, you can withdraw your contributions whenever you’d like without a penalty or taxes. However, you can only withdraw earnings penalty- and tax- free if you’re at least 59 ½ and have had your account open for at least five years, according to investment brokerage Charles Schwab.
“For example, if you make a Roth IRA contribution on March 1, 2026, you could withdraw that contribution on March 2, 2026, without tax or penalty - even if you are under 59½ and the account has been open less than five years - because those dollars were already taxed,” said Adam Bergman, founder of IRA Financial, in an email to The Independent.
In most cases, IRAs and 401(k)s require you to make withdrawals from a traditional IRA or 401(k) at age 73, according to the IRS. However, Roth IRA’s have no such rule.
Hardship withdrawals
That being said, there are situations - “hardships” - in which an individual could withdraw from their IRA or 401(k) and not face a penalty, according to investment brokerage Fidelity.
There are more than a dozen withdrawal hardships that may qualify for an interest exemption, including unreimbursed medical expenses, qualified educational expenses and health insurance premiums while unemployed, according to the IRS.
Tax time
IRAs and 401(k)s have two distinct tax structures: pre-tax and post-tax.
Pre-tax
Traditional IRAs and 401(k)s are known as “pre-tax” contributions; they aren’t taxed before going into an account. The benefit to this structure is that the money you contribute reduces your taxable income.
So, if someone earns $80,000 in a year and sends $10,000 into their 401(k), their taxable income would be $70,000 before other deductions. When they make withdrawals after they turn 59 ½, the IRS treats those withdrawals as income and taxes them, in most cases.
Post-tax
Roth IRAs and 401(k) contributions are made with post-tax dollars, meaning you pay the taxes up front instead of when you withdraw in retirement.
Additionally, your contributions don’t reduce your taxable income as they do with traditional IRAs and 401(k)s. However, in most cases, you can take your distributions tax-free as long as you’re at least 59 ½ years old and have had your account for at least five years.
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