What Is a 401(k) or IRA? Retirement Accounts Explained

A 401(k) and an IRA (Individual Retirement Account) hold investments for retirement, with tax rules that differ from a regular brokerage account. Neither is an investment on its own. Think of them as a container that holds investments like funds or stocks.

401(k): through an employer

An employer sponsors a 401(k), sets up the plan, and often picks a limited menu of investment options. Many employers add a matching contribution, putting in additional money based on how much you contribute, up to a limit. That match works like part of your compensation when you use it.

IRA: opened on your own

You open an IRA individually through a brokerage, independent of any employer, and it generally offers a wider range of investment choices than a typical 401(k). Anyone with eligible income qualifies to open one, whether or not their employer offers a 401(k).

Traditional vs. Roth: the tax tradeoff

Both 401(k)s and IRAs commonly come in two tax versions.

• Traditional. Contributions reduce your taxable income now. Withdrawals in retirement get taxed as income.
• Roth. Contributions do not reduce your taxable income now. Qualified withdrawals in retirement come out tax-free.

The better choice between the two depends on your current tax rate against your expected tax rate in retirement. That calculation is personal, not one-size-fits-all.

Check the employer match first

Before optimizing between account types, check your employer's 401(k) match. Leaving matching contributions unclaimed means leaving part of your compensation unclaimed, a foundational fact worth checking before other retirement decisions.

Once money sits in one of these accounts, the same investment questions apply: how much to contribute, what to invest in, and when you retire. Our investing basics guide and retirement calculator cover those next steps.

Contribution limits, income limits, and tax rules for these accounts change over time and depend on your specific situation. Talk to a licensed tax or financial professional about your circumstances.