401(k) vs IRA: workplace against personal

The difference is not the fund. A 401(k) and an IRA are wrappers around ordinary investments. The same index fund returns the same amount in either; what changes is who can put money in, how much, whether an employer adds any, which holdings the wrapper will accept, and how you get at the balance later.

In the United States a 401(k) is a workplace plan named for the tax-code section that created it. A 403(b) at a school or hospital, or a 457 plan at a government employer, is the same idea under a different section. An IRA, an individual retirement arrangement, is an account you open yourself at a bank or a broker. SEP IRAs and SIMPLE IRAs sit in between: they are employer plans that use the IRA legal form, so the table above is a standard workplace 401(k) set against a personal IRA.

Both wrappers come in a traditional version and a Roth version. Traditional money goes in as pre-tax dollars, or with a deduction that has the same effect, and is tax deferred until withdrawal. Roth money is taxed on the way in and a qualified withdrawal is not taxed. That choice is the same arithmetic inside either wrapper, and it is the subject of the Roth against traditional comparison rather than of this one. This page is about the wrappers.

The names do not travel. Other countries run workplace pensions and personal wrappers under their own statutes. What follows is the United States pairing.

Two facts usually put the workplace plan first, and they are not the same fact.

The first is the match. An IRA cannot receive one. A 401(k) can. The common quote, a rate applied to the first slice of pay you defer, is extra pay deposited into the plan, not a percentage return to compound:

$$M = S \times \min(d, c) \times m$$

$S$ is salary, $d$ the share of pay you defer, $c$ the matched slice and $m$ the match rate. Deferring past $c$ still raises your own contribution and does not raise $M$. Inside $c$, each unit you defer brings the match with it, which is why the usual order is to take the whole match before arguing about anything else. Vesting is a separate rule: some plans hand the match over as it is paid, some require years of service, and employee deferrals are yours from the day they go in. The employer match calculator runs that formula on a salary and a deferral.

The second is the cap. In the United States the employee deferral limit is several times the IRA limit, extra contributions from ages set by statute are larger on the workplace side, and a still larger combined limit counts what the employer adds. Those ceilings move with legislation and with inflation adjustments, so they are figures to look up for the year you are funding. Workplace deferrals do not fill the IRA cap, which is why the two accounts can be funded in the same year.

After the match is captured, the next unit of currency is a comparison of fees, menu and tax treatment rather than a comparison of free money. A workplace plan with high costs and a short list can lose that comparison to an IRA even while the match itself is still worth taking. The tax-advantaged accounts guide is the place that comparison sits in the wider set of wrappers.

Retirement wrappers pay for their tax treatment partly in access. Early withdrawals from either generally face ordinary income tax plus an extra penalty, subject to a list of exceptions, until a set age. The lists are not the same list.

A 401(k) may allow a loan against the balance, on terms the plan document sets. An IRA cannot be borrowed from. A 60-day rollover looks like a short loan and is not one: miss the window and the amount is a distribution. Some penalty exceptions, including certain education costs and a first-home amount, apply to IRAs and not to 401(k) plans. Roth IRA contributions, though not the earnings on them, can be withdrawn at any age. The workplace plan has a penalty exception the IRA does not share: in the United States, leaving the employer in or after the year you reach a set age, often called the rule of 55, can let you draw from that employer's plan without the extra penalty. Roll the same money to an IRA and that exception is gone.

Leaving a job is the moment the two wrappers meet. The usual paths are to leave the balance in the old plan if the plan allows it, move it to a new employer's plan, move it to an IRA, or cash it out. Cashing it out is a taxable distribution, with the penalty if you are under the age test, not a transfer. A direct plan-to-plan or plan-to-IRA rollover keeps the tax status intact. An IRA that holds money rolled out of a workplace plan is still an IRA from then on: the menu widens, the loan disappears, and the rule-of-55 exception disappears with it.

Required withdrawals follow the traditional side of either wrapper at an age set by statute. One workplace-plan exception is worth naming because rolling to an IRA gives it up: money still in a current employer's 401(k) can, for someone who is not an owner above a set threshold, wait until actual retirement. A traditional IRA has no such still-working rule.

The caps are separate, so contributing to a 401(k) does not use up the IRA room, and contributing to an IRA does not use up the workplace room. In the United States that is the usual way both get funded in one year: enough payroll deferral to take the match, then a decision about the IRA, then a decision about deferring past the match up toward the workplace cap.

Income tests apply only on the IRA side of that sequence. A Roth 401(k) deferral has no income phase-out; a Roth IRA contribution does. A traditional 401(k) deferral has no income phase-out; a traditional IRA deduction phases out once a workplace plan already covers you. Plan non-discrimination testing can still cap highly compensated employees, which is a workplace-plan rule rather than an IRA-style phase-out. The traditional IRA contribution can still be made when the deduction cannot, which is after-tax money sitting inside a deferred wrapper, a different object from either a Roth contribution or a deductible one. The Roth against traditional page is the arithmetic for which tax timing to pick; this page is only where those tests attach.

Payroll is the other practical difference. A 401(k) deferral leaves the bank account before the pay does, which is why people actually fund it. An IRA contribution has to be made on purpose, and it can be made up to the tax filing deadline for that year rather than only during it. A spousal IRA is the case the workplace plan cannot copy: earned income from one spouse can fund an IRA for the other.

None of this picks a mix for a particular household. The match, the two caps, the menus, the income tests and the access rules are the pieces the arithmetic runs on. Which mix fits turns on pay, the plan document, and tax facts this page does not have, which is why this is educational material and not financial advice.