401(k) vs. IRA: Which Retirement Account Is Right for You?
The 401(k) vs. IRA question isn't really "either/or" — most people should use both. But understanding the differences helps you prioritize where your dollars go first.
The Key Differences at a Glance
| Feature | 401(k) | Traditional IRA | Roth IRA |
|---|---|---|---|
| 2026 Contribution Limit | $23,500 ($31,000 if 50+) | $7,000 ($8,000 if 50+) | $7,000 ($8,000 if 50+) |
| Tax Treatment | Pre-tax contributions; taxed on withdrawal | Pre-tax contributions; taxed on withdrawal | After-tax contributions; tax-free withdrawal |
| Employer Match | Often yes (free money) | No | No |
| Income Limits | None | Deduction phases out at higher incomes | Contribution phases out ~$150K–$165K single |
| Investment Options | Limited to plan menu | Nearly unlimited | Nearly unlimited |
| Required Distributions | Age 73 (RMDs) | Age 73 (RMDs) | None during your lifetime |
The Priority Order for Retirement Savings
Most financial advisors recommend this order:
- 401(k) up to the employer match — this is free money (typically 3–6% of salary matched dollar-for-dollar or 50 cents on the dollar). Not contributing enough to get the full match is leaving compensation on the table.
- Max out a Roth IRA ($7,000 in 2026) — if your income qualifies. Tax-free growth and no RMDs make this the most powerful long-term wealth builder for most people.
- Go back and max out the 401(k) ($23,500 in 2026) — after funding the Roth IRA.
- Taxable brokerage account — after maxing tax-advantaged accounts.
When to Prioritize a 401(k)
- Your employer offers a generous match — always capture the full match first
- You're in a high tax bracket now and expect to be in a lower bracket in retirement
- You want the higher contribution limit ($23,500 vs. $7,000)
- Your 401(k) has good, low-cost index fund options
When to Prioritize a Roth IRA
- You're early in your career and in a lower tax bracket (Roth contributions are taxed at today's low rate)
- You want tax-free income in retirement
- You want no required minimum distributions
- You want more investment choices than your 401(k) offers
- You believe tax rates will be higher when you retire
The Roth vs. Traditional Decision
The fundamental question: Do you want to pay taxes now (Roth) or later (Traditional)? If you expect your tax rate to be higher in retirement, Roth wins. If you expect it to be lower, Traditional wins. For most young workers in moderate tax brackets, Roth is the better bet because taxes historically trend upward and your money has decades to grow tax-free.
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