Both a 401(k) and an individual retirement account (IRA) are designed to help you save for retirement, but they operate under different rules and offer distinct advantages. You may find that contributing to both is a good approach for your situation.
This article does not cover specialized plans like Starter 401(k) accounts, SEP IRAs, or SIMPLE IRAs.
The table below highlights key differences between a standard 401(k) plan and an individual retirement account (IRA), including contribution rules, tax treatment, and withdrawal guidelines.
Feature
Standard 401(k)
IRA
Eligibility
Any employee who meets the eligibility requirements of their employer-sponsored plan and has eligible compensation.
Open to anyone meeting the IRS income requirements.
Contribution types
Gusto Retirement plans allow for pre-tax and Roth elective deferral contributions.
Gusto IRAs allow for traditional and Roth contributions. Income limitations may affect your ability to deduct traditional contributions or make Roth contributions.
Who contributes
You and possibly your employer, if the plan offers an employer match or profit-sharing contribution. Employer contributions are generally made as pre-tax contributions.
Only you can make contributions.
Tax treatment
Pre-tax: Contributions are tax-deferred and not included in taxable income for that tax year. Roth: Contributions are included in taxable income in the year they are made.
Traditional: Contributions are generally tax-deductible and not included as taxable income. Roth: Contributions are included in taxable income at the time they are made.
Contribution method
Employee deferral contributions are deducted directly from payroll. For a sole proprietor or partner, contributions are generally made through owner contributions.
Contributions are deducted from a connected savings or checking account.
Contribution limits
Higher contribution limits than IRAs. 401(k) limits are combined across pre-tax, Roth, and certain other plans. See current year contribution limits.
Lower limits than 401(k) accounts. IRA limits are combined across Roth and traditional contributions. See current year contribution limits.
Catch-up contributions
Catch-up contributions are allowed and vary based on age, starting at age 50 or older in the current tax year.
Catch-up contributions are allowed starting at age 50 or older in the current tax year.
Income limitations
No applicable income limitations.
There are income requirements to (1) deduct the traditional IRA contribution or (2) make a Roth IRA contribution.
Taxes on earnings
Regardless of contribution type, earnings are not taxed while they remain in the plan.
Regardless of contribution type, earnings are not taxed until they are distributed from the account.
Taxation on distributions
Pre-tax elective deferrals: The distribution amount is taxed as ordinary income. Roth elective deferrals: Distribution of elective deferral contributions (basis) are always tax-free. Earnings on the basis are also tax-free if the distribution meets the requirements for a qualified distribution.
Traditional: The amount is taxed as ordinary income. Nondeductible contributions made to a traditional IRA are not taxable (tracked by the account owner on IRS Form 8606). Earnings on nondeductible contributions are taxable. Roth: Distribution of Roth contributions (basis) are always tax-free. Earnings on the basis are also tax-free if the distribution meets the requirements for a qualified distribution.
Withdrawal penalties
Generally, yes. A 10% early withdrawal penalty tax applies if withdrawn before reaching age 59½, unless an early withdrawal penalty tax exception applies. The penalty tax applies to the taxable portion of the distribution.
Generally, yes. A 10% early withdrawal penalty tax applies if withdrawn before reaching age 59½, unless an early withdrawal penalty tax exception applies. The penalty tax applies to the taxable portion of the distribution.
Account protection
Generally, your full account balance is protected from creditors as long as it stays in the plan. Exceptions include: (1) a qualified domestic relations order (QDRO); (2) federal tax liens for unpaid federal income taxes; (3) federal criminal penalties or fines; (4) judgments in criminal wrongdoing against the plan. For plans not covered by the Employee Retirement Income Security Act (ERISA), state law determines if the account is subject to creditors. If you declare bankruptcy, non-ERISA plan assets are protected under federal law up to $1,711,975 (as of Apr 1, 2025).
Since IRAs are not qualified retirement plans under the IRS code, state law determines if the account is subject to creditors and can vary significantly between states. Federal law protects IRA assets in the event of bankruptcy up to $1,711,975 (as of Apr 1, 2025).
Withdrawal rules
While employed: Generally, you can request a distribution from a Gusto Retirement plan upon reaching age 59½ or if you incur a hardship. Upon leaving employment: You may request a distribution of your full account balance at any time after leaving employment. However, if a distribution is taken before reaching age 59½, a 10% early withdrawal penalty tax may apply to the taxable portion. See the full list of penalty exceptions.
IRA contributions are distributable at any time. However, if you request a distribution before reaching age 59½, a 10% early withdrawal penalty tax may apply to the taxable portion. See the full list of penalty exceptions.
Visit the IRS website to learn more about 401(k) accounts, Roth accounts, and IRAs.
This article is for informational purposes only and is not intended to be construed as investment or tax advice. For more information, consult a qualified tax or financial advisor.