Should I contribute to a 401k or an IRA first?

Contribute to a 401k first, at least up to the employer match, since the match is free money that is too valuable to pass up. A typical employer match is 50 cents to 1 dollar per dollar contributed, up to 3 to 6 percent of salary. After meeting the match, the next step is to max out a Roth IRA, since the IRA offers more investment options, lower fees, and tax free growth. After maxing out the Roth IRA, go back to the 401k and increase the contribution. The exception is when the 401k has very high fees or limited investment options, in which case the IRA may be a higher priority.

Is a Roth IRA better than a traditional IRA?

A Roth IRA is usually better for young investors who expect to be in a higher tax bracket in retirement than they are now, since the contributions are made with after tax dollars and the withdrawals in retirement are tax free. A traditional IRA is usually better for investors who expect to be in a lower tax bracket in retirement, since the contributions are tax deductible and the withdrawals are taxed as ordinary income. For most young and middle income investors, the Roth IRA is the stronger choice, since tax rates have been trending down over long periods and the tax free growth is a powerful benefit.

Can I have both an IRA and a 401k?

Yes, you can have both an IRA and a 401k in the same year, as long as you do not exceed the contribution limits for each. The 2026 limit is 7,500 dollars across all IRAs (traditional plus Roth) and 24,500 dollars across all 401k plans. Many investors contribute to both, with the strategy being to max out the 401k up to the employer match first, then max out a Roth IRA, then return to the 401k for the rest. For high income earners, the backdoor Roth IRA is a strategy for getting money into a Roth IRA when income exceeds the Roth IRA income limit.

IRA vs 401k 2026 Retirement Guide

What an IRA Is and How It Works

An IRA, or individual retirement account, is a personal retirement account that anyone with earned income can open at a brokerage such as Fidelity, Vanguard, Charles Schwab, or E*TRADE. There are several types of IRAs, including the Traditional IRA, the Roth IRA, the SEP IRA for self employed individuals, and the SIMPLE IRA for small businesses. Traditional IRA contributions may be tax deductible, depending on income and employer coverage, and the money grows tax deferred until withdrawal in retirement. Roth IRA contributions are not tax deductible, but the money grows tax free and the withdrawals in retirement are also tax free, provided the account has been open for at least 5 years and the owner is over 59 and a half.

What a 401k Is and How It Works

A 401k is an employer sponsored retirement plan that allows employees to contribute pre tax dollars from their paycheck, often with an employer match, and the money grows tax deferred until withdrawal. Most 401k plans offer a limited menu of mutual funds, and some plans offer a self directed brokerage option for additional investment choices. The contribution limit in 2026 is 24,500 dollars for those under 50, and 32,500 dollars for those 50 and older with the 2,000 dollar catch up contribution. The employer match is a key benefit, with a typical match being 50 cents to 1 dollar per dollar contributed, up to 3 to 6 percent of salary.

2026 Contribution Limits

The 2026 IRA contribution limit is 7,500 dollars for those under 50, and 8,500 dollars for those 50 and older with the 1,000 dollar catch up contribution. The 2026 401k contribution limit is 24,500 dollars for those under 50, and 32,500 dollars for those 50 and older with the 2,000 dollar catch up contribution. The 2026 SEP IRA limit for self employed individuals is 25,000 dollars, or 32,500 dollars for those 50 and older. The 2026 SIMPLE IRA limit is 16,500 dollars, or 20,000 dollars for those 50 and older. The 2026 Roth IRA income limit is 168,000 dollars for single filers and 240,000 dollars for married filing jointly, with the contribution phasing out above those thresholds.

Tax Benefits Compared

Traditional IRA and 401k contributions are made with pre tax dollars, which reduces the current year tax bill. The money grows tax deferred, and the withdrawals in retirement are taxed as ordinary income. Roth IRA and Roth 401k contributions are made with after tax dollars, which does not reduce the current year tax bill. The money grows tax free, and the withdrawals in retirement are also tax free. The best choice depends on the current tax bracket and the expected tax bracket in retirement. Most financial advisors recommend a mix of traditional and Roth contributions to diversify the tax exposure across retirement years.

When to Prioritize the 401k

Prioritize the 401k when the employer offers a match, since the match is free money that is too valuable to pass up. A typical employer match is 50 cents to 1 dollar per dollar contributed, up to 3 to 6 percent of salary. A 100,000 dollar salary with a 3 percent match means the employer contributes 3,000 dollars per year, which over a 30 year career at a 7 percent return is worth 300,000 dollars. Prioritize the 401k also when the fees are low and the investment options are good, since high fees can erode returns by 0.5 to 1 percent per year, which is a significant drag on long term growth.

When to Prioritize the IRA

Prioritize the IRA when the 401k has limited investment options, high fees, or no employer match. Many small employer 401k plans have expensive target date funds or limited index fund options, and the fees can be 0.5 to 1.5 percent per year. IRAs at major brokerages offer a much wider selection of low cost index funds and ETFs, with expense ratios of 0.03 to 0.20 percent. The lower fees can add 0.5 to 1 percent per year to the long term return, which compounds into a significant difference over 30 years. Prioritize the IRA also when the investor is in a low tax bracket, since the Roth IRA offers a better long term tax outcome.

What About Catch Up Contributions

Both IRAs and 401ks allow catch up contributions for those 50 and older. The IRA catch up is 1,000 dollars, bringing the 2026 limit to 8,500 dollars. The 401k catch up is 2,000 dollars, bringing the 2026 limit to 32,500 dollars. The catch up is a great way for older workers to boost their retirement savings in the final years before retirement. The 401k catch up is also an opportunity for high income earners to reduce their current year tax bill, since the 401k contribution lowers the taxable income. Many financial advisors recommend maxing out the catch up for the final 5 to 10 years of working, since the late career savings are often the most impactful.

How to Decide Between the Two

Start with the 401k, contribute at least enough to get the full employer match, since the match is free money. Then max out a Roth IRA, since the IRA offers more investment options, lower fees, and tax free growth. Then go back to the 401k and increase the contribution. The exception is when the 401k has very high fees or limited investment options, in which case the IRA may be a higher priority. For self employed individuals, a SEP IRA or a Solo 401k is a better fit than a 401k, since the contribution limit is higher and the fees are lower. The most important step is to start saving as early as possible, since the power of compound interest is enormous over a 30 to 40 year career.

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