There are a few key differences between an IRA and a 401(k). Both are great options for tax-advantaged retirement saving, as you don't pay any taxes on the growth of your investments. Read on to learn the differences between a 401(k) and an IRA and see which might be best for you.

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IRA vs. 401(k)

To quash one common myth, you don't have to choose between an IRA and a 401(k); you can have both. If you do have the option of a 401(k) at work, you lose the tax deduction benefits of an IRA once your income exceeds $74,000 ($123,000 if you're married filing jointly) in 2019.

Anyone who has earned income and is below the age of 70 1/2 can contribute to a traditional IRA, while only people who are employed at a company that offers a 401(k) can contribute to a 401(k). For Roth IRAs, your 2019 contribution limit begins to decrease when your income hits reaches $122,000 ($193,000 if married filing jointly), and you're not allowed to contribute at all if your income is higher than $137,000 ($203,000 if married filing jointly). If your company offers a Roth 401(k), there is no maximum income limit.

Maximum contribution level

A 401(k) has a significantly higher maximum contribution level than an IRA. For 2019, the maximum contribution limits are:

 

IRA

401(k)

Basic limit

$6,000

$19,000

Catch-up contribution limit for those aged 50 and older

$1,000

$6,000

Data source: IRS.

The employee contribution limits of 401(k)s are more than three times higher than those of IRAs, but with employer contributions added in, the 401(k)'s maximum contribution can become even more substantial than an IRA's.

The main advantage of a 401(k) is that employers can match or otherwise contribute to an employee's 401(k) account. Matching varies significantly from employer to employer, so you need to see what match your employer offers, if any. The limit, including employer contributions, is about 10 times higher than the maximum contribution in an IRA.

Plan type

IRA

401(k)

Account holder's contribution limit

$6,000

$19,000

Catch-up contribution limit for those aged 50 and older

$1,000

$6,000

Total contribution limit for those aged 50 and older

$7,000

$25,000

Maximum combined contribution for employee and employer

N/A

$56,000

Maximum combined contribution for employee and employer for those aged 50 and older

N/A

$62,000

Source: IRS.

For those who have the option of a 401(k) and an IRA, employer matching of contributions can significantly tilt the advantage toward investing with a 401(k). For instance, if your employer matches all contributions, that's equivalent to a 100% return on investment. It would take years in an IRA to achieve that same 100% return. Over time, those contributions compound, leading to far more growth over the long term.

There are two other pieces of information to consider when comparing an IRA and a 401(k): cost and flexibility. When you leave your job, you are no longer allowed to contribute to that employer's 401(k). You then have to make a choice between keeping your 401(k) with your company or rolling it over to an IRA. As there are no more matching contributions, cost and flexibility should have greater importance for you.

Cost

The costs associated with a 401(k) vary significantly: I've seen them range from nothing to 2% annually. To quickly find out whether your 401(k) is high-cost compared to others, check out Brightscope's retirement plan search. To find exact details, however, it's best to look at your 401(k) plan's documents.

If you are in a high-cost plan, or even a low-cost plan, an IRA can cost you a whole lot less, as most have little to no annual fees. You can compare IRA account providers here.

Flexibility

Most 401(k) plans offer limited investment options, with the average 401(k) plan offering 20 funds, according to Brightscope. While some 401(k)s now come with the option of a self-directed account -- meaning you can invest as you do with a normal brokerage account -- this is still not the norm. An IRA is more like a normal brokerage account, so your investment options are almost endless.

More questions?

 IRAs and 401(k)s each have their own restrictions to be aware of, but both are great tax-advantaged ways to save for retirement. Regularly contributing to either one is a great way to grow your investments for retirement. The more you contribute, the more your assets can compound over time. You should strongly consider maxing out your contributions, especially if they are eligible for an employer match.

If you have more questions on IRAs, check out The Motley Fool's IRA Center, a great resource for retirement planning.