401(k) vs IRA: Which Should You Use First?

Both a 401(k) and an IRA are retirement accounts with tax advantages — but they have different contribution limits, investment options, and rules. Most people should use both, but in the right order.

The 401(k): Basics

A 401(k) is an employer-sponsored retirement plan. You contribute pre-tax money (Traditional) or after-tax money (Roth 401k). 2025 contribution limit: $23,500 ($31,000 if 50+). Many employers match contributions — effectively doubling part of your investment immediately.

The IRA: Basics

An IRA (Individual Retirement Account) is opened by you at a brokerage — not through your employer. 2025 contribution limit: $7,000 ($8,000 if 50+). IRAs typically offer more investment options than 401(k) plans, and Roth IRAs have unique tax-free withdrawal flexibility.

The Optimal Order

1. 1Contribute to 401(k) up to the employer match — this is always first (it's a 50–100% instant return)
2. 2Max out Roth IRA — best tax treatment for most people, most flexible account
3. 3Go back and max out the 401(k) to the $23,500 limit
4. 4If still more to invest, open a taxable brokerage account

Roth vs Traditional: The Key Question

For both 401(k) and IRA, the Roth vs Traditional choice comes down to: are you in a lower or higher tax bracket now vs retirement? If lower now, Roth is better (pay taxes now at low rate, withdraw tax-free). If higher now, Traditional is better (defer taxes to when you're in a lower bracket).

What If You Don't Have a 401(k)?

Self-employed people have additional options: Solo 401(k) (up to $69,000 in 2025) and SEP-IRA (up to 25% of compensation). Both offer substantially higher limits than a regular IRA.