IRA or 401(k)? Choosing which tax-advantaged retirement account to put your hard earned money into can be difficult. Here we will break down the differences between them so you can decide where to build your nest egg.
A quick note: both an IRA and a 401(k) come in two distinct varieties, traditional and Roth. Although these two varieties have many unique traits the two main distinctions are:
Traditional: Your money gets deducted from your income and put into the account pre-tax, but you pay money on withdrawal.
Roth: The money put into the account has already been taxed, so you are able to withdraw the money without paying taxes.
To learn more about the differences between Roth accounts and Traditional accounts, check out our article: “xxx”
To learn more about 401(k)s, check out our article: “xxx”
It is important to note that all of these accounts carry strict contribution and withdrawal rules.
Now let’s get back to the topic at hand: IRA or 401(k)?
Here is the conventional wisdom:
Free Money!
Since many employers offer a match on 401(k) contributions, the general consensus is that you should always max out your employer-match first. Although matches vary between employers, a match could be 1:1 for the first $2,500, 2:1 up to 3% of your salary, etc. One drawback of a 401(k) is that you are limited to investing in only what your employer offers through their 401(k).
Back to the IRA
Once you max out the employer-match, you should then max out a Roth IRA or Traditional IRA for the year, or a combination of both. Unlike a 401(k), an IRA allows you to invest in almost anything. The annual contribution for an individual retirement account in 2026 is $7,500 for those under the age of 50.
This limit is spread across all individual retirement accounts, so you cannot invest $7,500 in a Traditional IRA and $7,500 in a Roth IRA in the same year.
Important Note: Traditional IRA tax deductions depend on your income if you already have a 401(k) at work. Keep in mind that your income can also limit your ability to deduct Traditional IRA contributions or to contribute to a Roth IRA entirely.
Back to the 401(k) or Brokerage Account
After maxing out your individual retirement account, return to the 401(k) and invest as much as you are able, although beware, these also have contribution limits ($24,500 per year).
Another option at this stage is to invest in a brokerage account that is not tax-advantaged but does not have contribution or withdrawal restrictions. This allows you to invest money for the short and medium term for goals other than retirement.
Disclaimer: This article is for informational and educational purposes only and should not be construed as specific legal, tax, or financial advice. IRS rules can change and individual situations vary. Always consult with a qualified financial advisor or CPA before making major financial decisions.