401(k) vs. IRA: What's the Difference and Which Should You Use?

Both 401(k)s and IRAs are tax-advantaged retirement accounts, but they work differently and serve different purposes. Understanding which to use — and in what order — can mean tens of thousands of dollars more at retirement.

What Is a 401(k)?

A 401(k) is a retirement account offered through your employer. You contribute pre-tax money (traditional 401k) or after-tax money (Roth 401k) directly from your paycheck. Many employers match a percentage of your contributions — that's free money.

• 2026 contribution limit: $23,500/year ($31,000 if age 50+)
• Employer match is common (e.g., 100% of first 3% of salary)
• Limited investment options (whatever funds your employer's plan offers)
• Must leave job to access money penalty-free before 59½ (with some exceptions)

What Is an IRA?

An IRA (Individual Retirement Account) is a retirement account you open yourself, independent of any employer. You have full control over where to open it and what to invest in.

• 2026 contribution limit: $7,000/year ($8,000 if age 50+)
• Traditional IRA: Contributions may be tax-deductible, withdrawals taxed
• Roth IRA: Contributions are after-tax, withdrawals are tax-free
• Full investment options: stocks, index funds, ETFs, bonds, REITs

Side-by-Side Comparison

• Contribution limit: 401(k) $23,500 vs. IRA $7,000
• Employer match: 401(k) yes (free money) vs. IRA no
• Investment options: 401(k) limited vs. IRA unlimited
• Tax deduction: Both traditional versions are deductible (IRA has income limits)
• Roth option: Both have Roth versions (Roth 401k and Roth IRA)
• Income limits: 401(k) none vs. Roth IRA has income limits ($165k single, $240k married)

The Optimal Priority Order

This is how most financial planners recommend prioritizing contributions:

1. 1401(k) up to the employer match — always do this first, it's a 50–100% instant return
2. 2HSA (if eligible) — triple tax advantage, use it before anything else after the match
3. 3Roth IRA up to the max ($7,000) — tax-free growth with more investment flexibility
4. 4401(k) up to the full limit ($23,500) — higher limit, still tax-advantaged
5. 5Taxable brokerage account — no limits, no restrictions, for any remaining savings

Traditional vs. Roth: Which Is Better?

The core question: are you in a higher tax bracket now or in retirement?

• If you're in a low bracket now (22% or below) and expect to be in a higher bracket later: Choose Roth — pay taxes now at the lower rate
• If you're in a high bracket now (32%+) and expect to be lower in retirement: Choose traditional — get the deduction now
• If you're young and early in your career: Almost always choose Roth
• If you're in peak earning years: Traditional often makes more sense

Can You Have Both a 401(k) and an IRA?

Yes — and you should. The contribution limits are separate. You can max out both a 401(k) ($23,500) and an IRA ($7,000) in the same year for a combined $30,500 in annual tax-advantaged retirement savings.