IRA vs. 401(k): Which is better?

An overview of this article

If you’re choosing between an IRA and 401(k) for retirement, the good news is that you can have both. Which account to prioritize depends on a few factors, starting with the differences between the accounts, and then your budget and financial priorities.

401(k) plan

Offered through an employer, and may have matching contributions.
Higher annual contribution limits compared to an IRA.
No flexibility with investment plan options or cost.

Individual retirement plan (IRA)

Opened by an individual at a bank or brokerage, and can come in Roth or traditional tax treatment.
Lower contribution limits compared to a 401(k).
More autonomy with cost and investment options.

How to decide between an IRA vs. 401(k)

If your employer offers a 401(k) with a company match: Consider putting enough money in your 401(k) to get the maximum match so you don't lose out on free money. Once you get the match, then consider maxing out an IRA for the year. After that, consider returning to the 401(k) and resuming contributions there. ↓ Learn more about this strategy.
If your employer doesn’t offer a company match: Consider skipping the 401(k) at first and start with an IRA or Roth IRA. After contributing up to the IRA limit, think about funding your 401(k) for the pre-tax benefit it offers. ↓ Learn more about this strategy.

Choosing between an IRA and a 401(k) plan? Both are designed to help you save for retirement, but knowing the key differences, as your financial ability and goals, can help you decide which to prioritize or how to take advantage of both.

IRA vs. 401(k): a side-by-side comparison

	401(k)	IRA
Annual contribution limit	Those under 50 can contribute $23,500, while those 50 and older can contribute $31,000. New for 2025, people age 60 to 63 can contribute up to $34,750 thanks to the Secure 2.0 Act.	The combined contribution limit for all IRAs is $7,000 in 2025 ($8,000 if age 50 and older).
Matching contributions	Many employers offer a match, typically around 3%.	Some brokers may offer IRA matches.
Tax treatment	Traditional 401(k) Contributions lower taxable income in the year they are made. Withdrawals in retirement are taxed as ordinary income. Roth 401(k) Some employers offer a Roth 401(k) option, in which employee contributions are made with after-tax dollars. Qualified withdrawals in retirement are tax-free.	Traditional IRA If deductible, contributions reduce taxable income in the year they are made. Distributions in retirement are taxed as ordinary income. Roth IRA No immediate tax benefit for contributions. Qualified withdrawals in retirement are tax-free.
Eligibility	Eligibility is not limited by income.	Traditional IRA No income limit for contributing to a traditional IRA. The ability to deduct for contributions is phased out at higher incomes if you or your spouse are covered by a workplace retirement account. Roth IRA Ability to contribute directly is phased out at higher incomes.
Investment cost and availability	Funds in a 401(k) may be less expensive than identical funds purchased outside of a 401(k). However, employees have no control over plan and investment costs, as well as investment selection. Investments may be pre-selected, and mostly mutual funds. Some plans have a brokerage option with access to investments outside of the plan.	You choose your provider, which gives you flexibility over cost and investment options. Popular investment options include stocks, bonds, mutual funds, etc.
Required minimum distributions	Required minimum distributions beginning at age 73 as of 2023, and will increase to 75 in 2033.	Traditional IRA Required minimum distributions beginning at age 73 as of 2023, and will increase to 75 in 2033. Roth IRA No required minimum distributions in retirement.
Early withdrawal rules (before age 59 ½)	Unless you meet an exception, early withdrawals of contributions and earnings are taxed and subject to a 10% penalty. See more on 401(k) early withdrawal rules.	Traditional IRA Unless you meet an exception, early withdrawals of contributions and earnings are taxed and subject to a 10% penalty. See more on traditional IRA withdrawal rules. Roth IRA Contributions can be withdrawn at any time, tax- and penalty-free. Unless you meet an exception, early withdrawals of earnings may be subject to a 10% penalty and income taxes. See the Roth IRA withdrawal rules.

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Choosing between an IRA and a 401(k)

After getting familiar with the differences between IRAs and 401(k)s, choosing between them depends on your situation and financial priorities.

If your employer offers a 401(k) match

1. Contribute enough to earn the full match. Check your employee benefits handbook. If you see that your employer matches any portion of the money you contribute to the company 401(k) plan, do not bypass this opportunity to collect your free money.

A company matching program is one of the biggest benefits of a 401(k). It means that your employer contributes money to your account based on the amount of money you save, up to a limit. A common arrangement is for an employer to match a portion of the amount you save up to the first 6% of your earnings.

Even if a 401(k) has limited investment choices or higher-than-average fees, carve out enough money from your paycheck to get the full company match, as it’s effectively a guaranteed return on those dollars.

2. Next, consider contributing as much as you’re able to an IRA. Depending on which type of IRA you choose — Roth or traditional — you can get your tax break now or in the future when you make withdrawals in retirement.

» Stuck between the two? See our Roth IRA vs. traditional IRA comparison

3. After maxing out a traditional IRA or Roth IRA, consider revisiting your 401(k). Even after you’ve gotten the employer match — and even if your investment choices are limited, which is one of the main drawbacks of workplace retirement plans — a 401(k) can still be beneficial because of the tax deduction.

The money you contribute to a 401(k) will lower your taxable income for the year dollar for dollar. And don’t forget about the added benefit of tax-deferred growth on investment gains.

Whether you want to invest in a 401(k) or an IRA (or both!) often comes down to two factors: One, if you have access to a 401(k) and if your employer offers a match, and two, how much disposable income you have. For a long time, I didn't have any disposable income to put toward investing — it all went toward groceries and rent. After I got a higher-paying job, I started with my 401(k). I contributed enough to get my employer match of 4%, and then I added money to a Roth IRA until I hit the contribution limit. After that, I went back to my 401(k) and increased my contributions there. I like to think of it as a cascading fountain: You add to each bucket until you hit the limit, then it flows into the next bucket. If you don't have enough to fill up a particular bucket, stop there.

Alana Benson

Investing Writer

If your employer doesn’t offer a 401(k) match

1. Consider contributing to a traditional or Roth IRA first. Not all companies match their employees' retirement account contributions. When that’s the case, choosing an IRA — and contributing up to the max — is generally a better first option. Some IRA brokers may even offer matching.

One of the biggest benefits of an IRA is that it offers access to a virtually unlimited number and type of investments, giving you much more control over your investment options: You can bargain-shop for low-cost index mutual funds and ETFs instead of being restricted to the offerings in a workplace retirement account, and you can avoid paying the administrative fees that many 401(k) plans charge.

» Curious about your options? How to invest your IRA

2. After maxing out IRA benefits, think about contributing to your 401(k). Here again, the tax deferral benefit of a company-sponsored plan is a good reason to direct dollars into a 401(k) if you have money left over after you’ve funded a traditional or Roth IRA.

Remember that if your income passes certain thresholds and you or your spouse put money into a workplace plan, your ability to deduct traditional IRA contributions may be reduced or eliminated. If you aren’t eligible for a traditional IRA deduction, you may still be eligible for a Roth IRA.

Also, even if you’re not eligible to deduct your traditional IRA contribution, you can make nondeductible contributions and still benefit from tax-deferred investment growth. It's also possible to convert an IRA into a Roth IRA by using a so-called backdoor Roth IRA.

» Ready to open an IRA? Check out our round-up of top IRA accounts