Both a 401(k) and an IRA are tax-advantaged retirement accounts available to American workers. Most people with access to both should use both — the real question is which one to fund first and how to allocate contributions across them. Getting that priority order right can add tens of thousands of dollars to your retirement balance over a career.
What Is a 401(k)?
A 401(k) is an employer-sponsored retirement savings plan. Contributions come directly from your paycheck before taxes (traditional) or after taxes (Roth 401(k)), and the money grows tax-deferred inside the plan. The defining feature is the employer match — most companies contribute 50 cents for every dollar you put in, up to 6% of your salary. On a $100,000 salary, contributing 6% ($6,000) earns a $3,000 employer match, giving you $9,000 invested with only $6,000 out of pocket. That is an immediate 50% return before any market gains — something no other account can replicate.
The 2026 contribution limit is $23,500, rising to $31,000 if you are 50 or older (the extra $7,500 is the catch-up contribution). There is no income limit for contributing to a traditional 401(k), which makes it accessible to all earners.
Investment options inside a 401(k) are limited to the menu your employer selects — typically 15–30 mutual funds or target-date funds. That is a meaningful constraint, but for most investors who want a diversified index fund portfolio, the typical plan menu has enough options. Use the 401k Calculator to project how your balance grows at different contribution rates and expected returns.
At age 73, traditional 401(k) account holders must begin taking required minimum distributions (RMDs) — the IRS requires you to withdraw (and pay tax on) a calculated portion of the balance each year.
What Is an IRA?
An individual retirement account (IRA) is a retirement savings account you open independently at any brokerage — it is not tied to your employer. The two main types are the traditional IRA (pre-tax contributions, taxable withdrawals) and the Roth IRA (after-tax contributions, tax-free withdrawals). The 2026 IRA contribution limit is $7,000, or $8,000 if you are 50 or older.
The Roth IRA's biggest advantage is its flexibility and tax treatment in retirement. Qualified withdrawals are completely tax-free, and a Roth IRA has no RMDs during the owner's lifetime, meaning you can let the money compound indefinitely. Traditional IRA withdrawals are taxed as ordinary income and RMDs begin at 73, matching the 401(k) rules.
The Roth IRA has an income limit: for 2026, contributions phase out between $150,000 and $165,000 MAGI for single filers and between $236,000 and $246,000 for married filing jointly. Above those limits, the backdoor Roth strategy — making a non-deductible traditional IRA contribution and then converting it — allows high earners to access a Roth IRA regardless of income.
The IRA's standout feature is investment freedom. Unlike a 401(k), you can invest in virtually any publicly traded security: individual stocks, ETFs, bonds, REITs, and more. This open architecture is especially valuable for investors who want low-cost index funds beyond what their employer plan offers. Use the Roth vs Traditional IRA Calculator to compare the after-tax outcomes of each IRA type based on your current and expected future tax rates.
401(k) vs IRA — Side-by-Side Comparison
| Dimension | 401(k) | IRA |
|---|---|---|
| 2026 contribution limit | $23,500 ($31,000 if 50+) | $7,000 ($8,000 if 50+) |
| Employer match | Yes — average 50% up to 6% of salary | No |
| Investment options | Limited to plan menu (~15–30 funds) | Unlimited — any stock, ETF, or fund |
| Income limit to contribute | None | Roth phase-out: $150k–$165k (single) |
| Roth option available | Yes (Roth 401(k)) | Yes (Roth IRA) |
| Penalty-free withdrawals begin | Age 59½ | Age 59½ |
| Required minimum distributions | Age 73 (traditional); Roth 401(k) has RMDs | None for Roth IRA; age 73 for traditional IRA |
| Loan provision | Yes — up to 50% of vested balance, max $50,000 | No |
| Portability | Rolls to IRA on job change | Fully portable; not tied to employer |
The Priority Order: Which to Fund First
Most financial planners recommend the same four-step sequence for allocating retirement dollars in 2026:
Step 1 — 401(k) up to the full employer match. The employer match is free money. A 50% match up to 6% of salary is equivalent to a guaranteed 50% return on that portion of your contribution. No IRA, brokerage account, or investment strategy consistently matches that. Never leave this on the table.
Step 2 — Max the Roth IRA ($7,000). Once you have the full match, shift to your Roth IRA. The Roth's tax-free compounding, unlimited investment options, and absence of RMDs make it the most flexible retirement asset you can own. If your income exceeds the Roth limit, use the backdoor Roth strategy instead.
Step 3 — Return to the 401(k) up to the annual limit ($23,500). After the Roth IRA is fully funded, go back to the 401(k) and contribute up to the $23,500 limit. This maximizes your total tax-advantaged space — $30,500 per year if you max both accounts (or $39,000 with catch-up contributions if you are 50+).
Step 4 — Taxable brokerage account. Once all tax-advantaged space is filled, additional savings go into a taxable brokerage account. While you lose the upfront tax break, long-term capital gains rates are favorable, and there are no withdrawal restrictions.
Use the Retirement Calculator to model the combined impact of funding a 401(k) and IRA together across your working years. The difference between funding both accounts versus only one is often $300,000–$500,000 or more by retirement, depending on your salary, time horizon, and rate of return.
Special Situations
High earners above the Roth IRA income limit should max the 401(k) first (especially any Roth 401(k) option), then use the backdoor Roth IRA to contribute $7,000 annually. If their plan allows after-tax contributions with in-plan Roth conversion (mega backdoor Roth), they can potentially shelter up to an additional $46,500 in Roth dollars.
Self-employed workers without an employer plan can open a Solo 401(k) — which carries the $23,500 employee limit plus employer contributions up to 25% of net self-employment income, for a combined maximum of $70,000 in 2026 — alongside a Roth or traditional IRA.
Job changers should roll their 401(k) to a traditional IRA via direct rollover when they leave an employer, converting the limited plan menu into the full IRA investment universe with no tax event.
Which Account Is Right for You?
For most W-2 employees with access to a 401(k) that offers an employer match, the answer is clear: use both accounts, following the four-step priority order above. The 401(k) match and higher contribution limit make it indispensable; the IRA's flexibility, investment freedom, and Roth tax treatment make it equally essential. They are complementary tools, not competitors.