A traditional IRA and a 401(k) have one major similarity: as excellent vehicles for retirement savings, they can offer tax-deferred growth and potential tax deductions. By understanding the key differences between these two retirement nest egg options, you can decide how each one may fit into your planning.
Key Differences Between a Traditional IRA and 401(k)
The differences between the two mainly revolves around who offers the account, the contribution limits, and investment options.
- Employer vs. Individual Setup
A 401(k) is an employer-sponsored retirement plan. You typically make contributions through payroll deductions, and many employers offer matching contributions up to a certain percentage.
Almost anyone can open a traditional IRA; it does not require employer sponsorship. IRA products are offered at most financial institutions, making it a much more accessible option if you’re not employed traditionally. - Contribution Limits
The 401(k) contribution limits are quite a bit higher compared to a traditional IRA. In 2025, you can contribute up to $23,500 to a 401(k),or $31,000 if you’re 50 or older.
The contribution limits for a traditional IRA are set at $7,000 in 2025, or $8,000 if you or your spouse are 50 or older. - Investment Options
A 401(k) offers limited investment options, since the employer determines the available investments. The options typically include a curated list of mutual funds, target-date funds, exchange-traded funds (ETFs), and others.
A traditional IRA can offer a much wider variety of investment options, ranging from stocks, bonds, and ETFs to real estate or precious metals.
Should You Choose a 401(k) or Traditional IRA?
If your employer offers a 401(k)-retirement plan option and a contribution program, then thait’s a great place to start. However, a traditional IRA can offer a powerful complement to a 401(k) for those who have one or it can, be an ideal retirement investment for self-employed individuals.
Find out more about your IRA options with Peoples National Bank of Kewanee today.
