Both a 401(k) and an IRA are retirement accounts with tax advantages. Both are worth using. The question most people get wrong isn’t which one is better – it’s which one should get your money first.
Here’s the order of operations that makes the most of both.
The Key Differences
401(k) – offered by your employer. Contributions come straight out of your paycheck before taxes. Many employers match a percentage of what you contribute. Investment options are limited to whatever your employer’s plan offers – usually a selection of mutual funds.
IRA – you open it yourself at any brokerage. Contributions come from your bank account after you’ve been paid. No employer involvement, no matching. But you have complete control over where you invest – any stock, ETF, or fund available at your brokerage.
Both have annual contribution limits. For 2026:
- 401(k): $23,500 per year ($31,000 if you’re 50 or older)
- IRA: $7,000 per year ($8,000 if you’re 50 or older)
Both come in Traditional (pre-tax) and Roth (after-tax) versions. For the full breakdown on that choice see: Roth IRA vs. Traditional IRA
The Employer Match – Always Do This First
If your employer offers a 401(k) match, contribute enough to get the full match before doing anything else. An employer match is a 100% return on your investment – nothing else in personal finance comes close.
If your employer matches 50% of contributions up to 6% of your salary, contribute at least 6%. Anything less is leaving free money on the table. This is the one piece of retirement advice that has no exceptions.
Why an IRA Comes Next
Once you’ve captured the full employer match, the next priority for most people is maxing out an IRA – before putting more into the 401(k).
Why? Two reasons:
More investment choices. Your 401(k) is limited to what your employer’s plan offers. An IRA opened at Fidelity, Schwab, or Vanguard gives you access to thousands of low-cost index funds and ETFs. IRAs typically offer a much wider range of investment options than 401(k) plans, giving you more control and flexibility.
Lower fees. Many 401(k) plans include funds with expense ratios of 0.5-1.5%. An IRA lets you access funds charging 0.03-0.05%. Over decades that difference compounds into a significant gap. See: ETFs vs Mutual Funds
Roth option. Even if your employer only offers a Traditional 401(k), you can open a Roth IRA independently. For most people under 40 in low-to-middle income brackets, the Roth is the better long-term choice.
The Order of Operations
This is the framework most financial planners recommend:
Step 1 – 401(k) to the match. Contribute exactly enough to capture every dollar of employer match. Not a dollar less.
Step 2 – Max your IRA. Contribute up to $7,000 ($8,000 if 50+) to a Roth or Traditional IRA depending on your situation.
Step 3 – Back to the 401(k). If you have more to invest after maxing the IRA, go back and increase your 401(k) contributions up to the $23,500 limit.
Step 4 – Taxable brokerage account. If you’ve maxed both and still have money to invest, open a regular brokerage account. No tax advantages but no limits either.
Most people won’t get past Step 2 or 3 at first – and that’s fine. The framework still applies: match first, IRA second, more 401(k) third.
When to Prioritize the 401(k) Over an IRA
The order above works for most people – but not everyone. Prioritise more 401(k) over IRA if:
- Your 401(k) has genuinely good low-cost index funds available (expense ratios under 0.10%)
- You earn too much to contribute to a Roth IRA directly ($161,000 single / $240,000 married in 2026)
- Your employer offers a Roth 401(k) – you get the Roth tax treatment without needing a separate account
The Simple Version
If this feels complicated, here’s the one-sentence version: get the full employer match, then open a Roth IRA and max it, then put any extra back into the 401(k).
Do that consistently for 20-30 years and you’ll be in better shape than most people who spent decades trying to optimize every detail.