Choosing between a 401(k) and an IRA is one of the most important decisions you'll make for your retirement. Both accounts offer significant tax advantages for retirement savings, but they work differently and have distinct rules. Understanding these differences can help you maximize your retirement savings and minimize your lifetime tax burden.
In this comprehensive guide, we'll break down everything you need to know about 401(k)s and IRAs, including the latest 2026 contribution limits, tax implications, and a clear framework for deciding which accounts to prioritize.
What is a 401(k)?
A 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their paycheck before taxes are taken out. Named after section 401(k) of the Internal Revenue Code, these plans have become the most common type of employer-sponsored retirement plan in the United States.
Key Features of a 401(k)
- Employer-sponsored: Only available through your workplace. Your employer sets up the plan and typically selects the investment options.
- Higher contribution limits: You can contribute significantly more to a 401(k) than an IRA each year.
- Employer matching: Many employers match a percentage of your contributions—this is essentially free money for your retirement.
- Automatic payroll deductions: Contributions are taken directly from your paycheck, making saving effortless.
- Traditional or Roth options: Many plans now offer both traditional (pre-tax) and Roth (after-tax) contribution options.
Traditional 401(k)
With a traditional 401(k), your contributions are made with pre-tax dollars. This means your taxable income is reduced in the year you contribute. For example, if you earn $80,000 and contribute $10,000 to your traditional 401(k), you'll only be taxed on $70,000 of income. Your money grows tax-deferred, and you pay income tax when you withdraw funds in retirement.
Roth 401(k)
A Roth 401(k) works differently. You contribute after-tax dollars, so there's no immediate tax benefit. However, your money grows tax-free, and qualified withdrawals in retirement are completely tax-free. This can be advantageous if you expect to be in a higher tax bracket in retirement.
What is an IRA?
An Individual Retirement Account (IRA) is a personal retirement savings account that you open and manage yourself through a bank, brokerage, or other financial institution. Unlike 401(k)s, IRAs are not tied to your employer, giving you more flexibility and control over your investment choices.
Key Features of an IRA
- Individual account: You open and manage the account yourself, independent of any employer.
- More investment options: IRAs typically offer a much wider range of investment choices than most 401(k) plans.
- Lower contribution limits: The annual contribution limit is much lower than a 401(k).
- Available to anyone with earned income: You don't need an employer to open an IRA.
- Income limits may apply: For Roth IRAs and deductible traditional IRAs, there are income restrictions.
Traditional IRA
A traditional IRA allows you to make tax-deductible contributions (subject to income limits if you have a workplace retirement plan). Your investments grow tax-deferred, and you pay income tax on withdrawals in retirement. This is similar to a traditional 401(k) but with more investment flexibility.
Roth IRA
A Roth IRA is funded with after-tax dollars, but qualified withdrawals in retirement are completely tax-free. Roth IRAs also have unique advantages: no required minimum distributions (RMDs) during the owner's lifetime, and contributions (not earnings) can be withdrawn anytime without penalty. However, there are income limits that may restrict your ability to contribute directly.
Side-by-Side Comparison: 401(k) vs IRA
| Feature | 401(k) | IRA |
|---|---|---|
| Who offers it | Employer | Banks, brokerages, financial institutions |
| 2026 Contribution Limit | $23,500 ($31,000 if 50+) | $7,000 ($8,000 if 50+) |
| Employer Match | Often available (free money!) | Not available |
| Investment Options | Limited to plan offerings | Virtually unlimited |
| Income Limits | None for contributions | Yes (for Roth IRA and deductible traditional IRA) |
| Loans Allowed | Yes (if plan permits) | No |
| Early Withdrawal Penalty | 10% before age 59½ | 10% before age 59½ (exceptions apply) |
| Required Minimum Distributions | Yes, starting at age 73 | Traditional: Yes. Roth: No (for original owner) |
2026 Contribution Limits
Understanding contribution limits is crucial for maximizing your retirement savings. Here are the current limits for 2026:
401(k) Contribution Limits (2026)
- Employee contribution: $23,500
- Catch-up contribution (age 50+): Additional $7,500
- Total limit (50+): $31,000
- Combined employee + employer limit: $70,000 (or $77,500 if 50+)
IRA Contribution Limits (2026)
- Standard contribution: $7,000
- Catch-up contribution (age 50+): Additional $1,000
- Total limit (50+): $8,000
Important Note: You Can Contribute to Both!
The 401(k) and IRA limits are separate. If you max out both accounts, someone under 50 could contribute $23,500 + $7,000 = $30,500 per year. Someone 50 or older could contribute $31,000 + $8,000 = $39,000 per year. That's substantial tax-advantaged savings!
Tax Treatment Explained
The tax treatment of your retirement accounts can significantly impact your wealth over time. Here's how each account type handles taxes:
Traditional (401k & IRA)
Best if you expect to be in a lower tax bracket in retirement.
Roth (401k & IRA)
Best if you expect to be in a higher tax bracket in retirement.
Which Account Should You Fund First?
Here's the generally recommended order for funding your retirement accounts:
401(k) up to employer match
If your employer offers matching contributions, contribute at least enough to get the full match. This is free money with an immediate 50-100% return. Never leave employer match on the table.
Max out Roth IRA (if eligible)
Roth IRAs offer tax-free growth and withdrawals, no RMDs, and the flexibility to withdraw contributions anytime. If you're within the income limits, prioritize maxing out your Roth IRA.
Max out 401(k)
After the match and Roth IRA, return to your 401(k) and contribute up to the maximum. The high contribution limit makes this a powerful wealth-building tool.
Consider HSA and taxable accounts
If you have a high-deductible health plan, an HSA offers triple tax advantages. After that, consider taxable brokerage accounts for additional savings.
Can You Have Both a 401(k) and an IRA?
Yes, absolutely! There's no rule preventing you from having both a 401(k) and an IRA. In fact, using both is often the optimal strategy for retirement savings. Here's what you need to know:
- You can contribute to both in the same year. The contribution limits are separate, so maxing out your 401(k) doesn't prevent you from also contributing to an IRA.
- Roth IRA has income limits. In 2026, single filers with modified AGI over $161,000 (or married filing jointly over $240,000) cannot contribute directly to a Roth IRA. However, the "backdoor Roth" strategy may be available.
- Traditional IRA deductibility may be limited. If you (or your spouse) have a workplace retirement plan and your income exceeds certain thresholds, your traditional IRA contributions may not be fully tax-deductible.
- Having both provides flexibility. A mix of traditional and Roth accounts gives you more options for tax-efficient withdrawals in retirement.
Decision Flowchart: Where Should You Contribute?
Use this flowchart to determine the optimal contribution strategy for your situation:
Does your employer offer a 401(k) match?
Yes: Contribute at least enough to get the full match. This is priority #1.
No: Skip to the next question.
Do you qualify for Roth IRA contributions?
Yes: Consider maxing out your Roth IRA next for tax-free growth.
No (income too high): Look into the backdoor Roth IRA strategy or contribute more to your 401(k).
Have more to save after Roth IRA?
Yes: Go back and max out your 401(k) ($23,500 in 2026).
No: You're doing great! Focus on maintaining your current savings rate.
Maxed out 401(k) and IRA?
Consider: HSA (if eligible), taxable brokerage account, or mega backdoor Roth (if your plan allows).
Conclusion: Start Where You Are
The debate between 401(k) and IRA isn't really about choosing one over the other—ideally, you'll use both to maximize your retirement savings. The key takeaways are:
- Always capture your employer match—it's free money.
- Roth accounts offer powerful tax-free growth—prioritize them if you qualify.
- The best account is the one you actually use—don't let perfect be the enemy of good.
- Start today—time is your greatest asset when it comes to compound growth.
Remember, everyone's financial situation is unique. If you're unsure about the best strategy for your specific circumstances, consider consulting with a fee-only financial advisor who can provide personalized guidance.