401(k) vs. IRA: Which Retirement Account Is Best?
Choosing between a 401(k) and an IRA — or deciding how to use both — is one of the most important decisions in your retirement planning. Both offer valuable tax advantages, but they have different rules, contribution limits, and features. Understanding these differences helps you maximize your retirement savings.
401(k) Overview
A 401(k) is an employer-sponsored retirement account. Your contributions are deducted directly from your paycheck before you see them, making saving automatic.
Key Features
- Contribution limits: For 2026, you can contribute up to $23,500 ($31,000 if you're 50 or older with catch-up contributions).
- Employer matching: Many employers match a portion of your contributions — typically 50–100% of the first 3–6% you contribute. This is essentially free money.
- Tax treatment (Traditional): Contributions reduce your taxable income now. You pay taxes when you withdraw in retirement.
- Tax treatment (Roth 401k): Contributions are made with after-tax dollars. Withdrawals in retirement are tax-free.
- Required Minimum Distributions (RMDs): Starting at age 73, you must begin withdrawing from traditional 401(k) accounts.
Pros
- Highest contribution limits of any retirement account
- Employer matching (free money)
- Automatic payroll deductions make saving effortless
Cons
- Limited investment options — you can only choose from what your employer's plan offers
- Some plans have high fees
- Less flexibility than IRAs
IRA Overview
An Individual Retirement Account (IRA) is opened independently at a brokerage of your choice. You have full control over your investment options.
Traditional IRA
- Contribution limit: $7,000 per year ($8,000 if 50 or older) for 2026.
- Tax deduction: Contributions may be tax-deductible, depending on your income and whether you have a workplace retirement plan.
- Taxes on withdrawal: You pay ordinary income tax on withdrawals in retirement.
Roth IRA
- Contribution limit: Same as Traditional — $7,000 ($8,000 if 50+).
- Income limits: Your ability to contribute phases out at higher income levels.
- Tax treatment: Contributions are after-tax, but qualified withdrawals in retirement are completely tax-free — including all growth.
- No RMDs: Roth IRAs don't require withdrawals at any age, making them excellent estate planning tools.
401(k) vs. IRA: How to Decide
Priority 1: Get Your Full Employer Match
If your employer offers a 401(k) match, contribute at least enough to receive the full match. No other investment gives you an immediate 50–100% return. This should be your first retirement savings priority.
Priority 2: Consider a Roth IRA
After getting your full match, many financial planners suggest funding a Roth IRA next. The tax-free growth and withdrawal benefits are extremely valuable, especially if you expect to be in a higher tax bracket in retirement.
Priority 3: Max Out Your 401(k)
If you still have money to save after maximizing your employer match and funding your Roth IRA, increase your 401(k) contributions toward the annual limit.
Traditional vs. Roth: The Tax Question
The core decision between traditional and Roth comes down to when you want to pay taxes:
- Traditional: Pay less tax now, more in retirement. Best if you expect your tax rate to be lower in retirement than it is today.
- Roth: Pay tax now, nothing in retirement. Best if you expect your tax rate to be the same or higher in retirement.
For many younger workers, Roth accounts make sense because they're likely in a lower tax bracket now than they will be later. For more on tax strategy, see our guide on commonly missed tax deductions.
Can You Have Both?
Yes. You can contribute to both a 401(k) and an IRA in the same year, subject to each account's contribution limits. Many people use a strategy of: 401(k) up to the employer match → Roth IRA to the max → additional 401(k) contributions.
Getting Started
If you're new to retirement saving, don't let the complexity paralyze you. The most important step is to start — even with small amounts. Check our investing for beginners guide and retirement savings benchmarks by age to see where you stand and build your plan.
The best retirement account is the one you actually use consistently. Start contributing today, increase your rate over time, and let compounding do its work.
