How to choose
What to weigh before you pick
It usually comes down to 3 things. Compare your options on each before deciding.
Account fees and fund expense ratios that compound over time.
Account types, available investments, and tools.
App quality, research, and human support when needed.
Bottom line: Use both. The priority order for most people: (1) 401(k) up to the employer match, which is free money you should never leave on the table; (2) Roth IRA up to the annual limit for better investment flexibility and tax-free growth; (3) back to 401(k) up to the annual limit; (4) taxable brokerage for anything beyond. The accounts are complementary, not competing.
Both 401(k)s and IRAs let your investments grow tax-advantaged, but they have different rules, limits, and trade-offs. Understanding the distinction helps you use each account for what it does best.
Side-by-Side Comparison
- 401(k)
- $24,500 ($32,500 if 50+; $35,750 for ages 60-63)
- Traditional IRA
- $7,500 ($8,600 if 50+)
- Roth IRA
- $7,500 ($8,600 if 50+)
- 401(k)
- Yes, the main advantage
- Traditional IRA
- No
- Roth IRA
- No
- 401(k)
- Pre-tax (reduce taxable income now; taxed in retirement)
- Traditional IRA
- Pre-tax (if eligible)
- Roth IRA
- Post-tax (taxed now; tax-free in retirement)
- 401(k)
- None for contributions
- Traditional IRA
- None for contributions; deductibility phases out
- Roth IRA
- Phase-out $150k–$165k (single); $236k–$246k (married)
- 401(k)
- Limited to plan menu (often 10–30 funds)
- Traditional IRA
- Any investment available at your brokerage
- Roth IRA
- Any investment available at your brokerage
- 401(k)
- Yes, starting at age 73
- Traditional IRA
- Yes, starting at age 73
- Roth IRA
- No (during owner's lifetime)
- 401(k)
- 10% before age 59½ (exceptions apply)
- Traditional IRA
- 10% before age 59½ (exceptions apply)
- Roth IRA
- Contributions anytime; earnings taxed+penalized before 59½
The 401(k): Advantages and Limitations
Biggest advantage: employer match. If your employer matches 50% of contributions up to 6% of salary, you receive a guaranteed 50% return on that portion before the market does anything. This is the most valuable benefit in personal finance. Always contribute at least enough to get the full match.
Limitation: restricted investments. Most 401(k) plans offer 10–30 fund options selected by your employer. Some plans have expensive options (expense ratios above 0.5–1%). You cannot buy individual stocks, ETFs outside the plan menu, or real estate.
Limitation: plan quality varies. A good 401(k) plan has low-cost index funds (Vanguard, Fidelity, Schwab options). A bad one charges high fees through actively managed funds. Check your plan's fund expense ratios; if they average above 0.5%, prioritize IRA after the match.
The IRA: Advantages and Limitations
Biggest advantage: investment flexibility. At Fidelity, Schwab, or Vanguard, you can invest in any stock, ETF, index fund, or mutual fund available. This is especially valuable if your 401(k) plan has expensive options.
Limitation: lower contribution limit. $7,500/year vs. $24,500 for a 401(k). You cannot save as much in an IRA alone.
Limitation: income limits for Roth. Above the income threshold, you cannot contribute directly to a Roth IRA (the backdoor Roth workaround exists).
Traditional vs. Roth IRA: The deductibility of traditional IRA contributions also has income limits if you have a 401(k) at work. Above certain income thresholds, traditional IRA contributions are not deductible, making the Roth IRA the better choice for most middle-income earners.
- The Roth vs. traditional choice comes down to a tax timing question: do you expect to be in a higher or lower tax bracket in retirement? If higher (young, early career, expecting income growth), pay taxes now with a Roth. If lower (peak earning years, expecting income to drop in retirement), defer with a traditional 401(k)/IRA. Most people benefit from having both for tax diversification in retirement.
- After leaving a job, roll your 401(k) into an IRA rather than the new employer's plan if the old plan had poor investment options. An IRA rollover is tax-free and unlocks the full investment universe. Rollover to a traditional IRA (not Roth) to avoid a taxable event, then convert to Roth separately if desired.
- Self-employed individuals have access to a Solo 401(k) or SEP-IRA, both of which allow much higher contributions than a standard IRA. A Solo 401(k) allows a combined employee-plus-employer contribution up to $72,000 in 2026, the highest-limit retirement account available to self-employed earners.
The Priority Order
Step 1: 401(k) to the match. Contribute enough to get your full employer match. If your employer matches 50% of 6% of salary, put in at least 6%. This is a 50% guaranteed return.
Step 2: Roth IRA to the limit. $7,500/year in a Roth IRA. Better investment options than most 401(k)s, tax-free growth, no RMDs.
Step 3: 401(k) to the annual limit. If you have more to invest after the Roth IRA, increase 401(k) contributions up to $24,500.
Step 4: Taxable brokerage. For savings beyond the tax-advantaged limits. No special tax treatment, but no restrictions either.
Can You Contribute to Both in the Same Year?
Yes. Contributing to a 401(k) does not prevent you from also contributing to an IRA. The limits are independent. A 35-year-old can contribute $24,500 to a 401(k) AND $7,500 to a Roth IRA in the same year, a combined $32,000 in tax-advantaged retirement savings.
Contribution limits and tax rules are updated annually. Verify current figures on irs.gov.
Frequently Asked Questions
Should I max out my 401(k) or my IRA first?
Can I contribute to both a 401(k) and an IRA in the same year?
What is the 2026 contribution limit for a 401(k) and an IRA?
Is a Roth IRA or traditional IRA better?
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