What does a 401k versus IRA difference really mean?

A 401k is an employer-sponsored retirement account, meaning you sign up through your job. Contributions come directly from your paycheck before taxes, and many employers match a portion of what you contribute, which is essentially free money. The annual contribution limit is much higher, around $23,000 in 2024. An IRA is an individual account you open yourself through a brokerage, independent of any employer. It has a much lower contribution limit of $7,000 annually. A traditional IRA works similarly to a 401k with pre-tax contributions, while a Roth IRA uses after-tax money but grows tax-free. IRAs typically offer more investment choices than 401ks. Most financial advisors suggest contributing enough to your 401k to get the full employer match first, then funding an IRA for greater flexibility.