IRA vs. 401(k): Which Retirement Plan Should You Prioritize?

Advertiser Disclosure

This article may contain references to products or services from one or more of our advertisers or partners. We may receive compensation when you click on links to those products or services. Nonetheless, our opinions are our own.

Planning for retirement is one of the most important financial decisions you’ll make. Two of the most popular retirement savings vehicles in the U.S. are Individual Retirement Accounts (IRAs) and 401(k) plans.

Each offers unique benefits, and understanding their differences can help you determine which one to prioritize. Below, we’ll compare IRAs and 401(k)s to help you make the best choice for your financial future.

Summary hide

Key Differences Between an IRA and a 401(k)
Evaluating Your Retirement Goals and Income Needs
When to Prioritize a 401(k) Over an IRA
When an IRA Might Be the Better Option
The Best Strategy: Using Both
Recommended Reads

Key Differences Between an IRA and a 401(k)

An IRA and a 401(k) both serve the same purpose—helping individuals save for retirement—but they function differently.

Employer Sponsorship: A 401(k) is an employer-sponsored retirement plan, whereas an IRA is opened individually.
Contribution Limits: In 2024, 401(k) plans allow contributions of up to $23,000 ($30,500 for those aged 50 and older). In contrast, IRAs have a much lower contribution limit of $7,000 ($8,000 for individuals 50 and older).
Tax Treatment: Both plans offer tax advantages. Traditional IRAs and 401(k)s provide tax-deferred growth, meaning you pay taxes upon withdrawal. Roth versions of these accounts allow tax-free withdrawals in retirement.
Investment Options: IRAs typically offer a broader range of investment choices compared to 401(k)s, which are limited to the employer’s plan offerings.
Employer Matching: One major advantage of a 401(k) is the possibility of employer matching contributions, which can significantly boost your retirement savings.

Evaluating Your Retirement Goals and Income Needs

Deciding between an IRA and a 401(k) largely depends on your retirement goals and current financial situation. If your employer offers a 401(k) with a matching contribution, it’s usually best to contribute enough to take full advantage of that match—after all, it’s essentially free money.

Once you’ve maximized your employer match, consider contributing to an IRA to diversify your investment options and potentially lower your taxable income.

One of the best ways to assess your long-term financial needs is by using a retirement income calculator. This tool can help you estimate how much you’ll need to save in order to maintain your desired lifestyle in retirement. If your projected savings fall short, you may need to prioritize contributions to both accounts or explore additional savings strategies.

When to Prioritize a 401(k) Over an IRA

A 401(k) should be your first choice in certain scenarios:

Employer Matching: If your employer offers a match, prioritize contributions up to the matching limit.
Higher Contribution Limits: If you want to save more than the IRA limits allow, a 401(k) lets you contribute significantly more.
Automatic Payroll Deductions: Since 401(k) contributions are deducted directly from your paycheck, it’s an effortless way to save consistently.

When an IRA Might Be the Better Option

In some cases, an IRA could be the smarter choice:

More Investment Options: If your 401(k) plan has limited investment choices or high fees, an IRA offers more flexibility.
Tax Strategy: If you expect to be in a higher tax bracket in retirement, a Roth IRA allows tax-free withdrawals, which can be advantageous.
No Required Minimum Distributions (RMDs) on Roth IRAs: Unlike traditional 401(k)s and traditional IRAs, Roth IRAs do not require withdrawals at age 73, allowing for more strategic retirement planning.

The Best Strategy: Using Both

For many individuals, the ideal approach is to contribute to both a 401(k) and an IRA. Start by maxing out your 401(k) match, then contribute to an IRA to take advantage of tax benefits and investment flexibility. If you still have room in your budget, consider increasing your 401(k) contributions to reach the annual limit.

Choosing between an IRA and a 401(k) depends on your financial goals, employment situation, and investment preferences.

By understanding their differences and leveraging the benefits of each, you can build a well-rounded retirement strategy. Use financial tools like a retirement income calculator to determine the best savings approach for your needs and ensure a comfortable retirement.

The FangWallet Promise

FangWallet is an editorially independent resource - founded on breaking down challenging financial concepts for anyone to understand since 2014. While we adhere to editorial integrity, note that this post may contain references to products from our partners.

The FangWallet promise is always to have your best interest in mind and be transparent and honest about the financial picture.

Become an Insider

Editorial Disclaimer: The editorial content on this page is not provided by any of the companies mentioned. The opinions expressed here are the author's alone.

The content of this website is for informational purposes only and does not represent investment advice, or an offer or solicitation to buy or sell any security, investment, or product. Investors are encouraged to do their own due diligence, and, if necessary, consult professional advising before making any investment decisions. Investing involves a high degree of risk, and financial losses may occur including the potential loss of principal.

Advertiser Disclosure: This article may contain references to products or services from one or more of our advertisers or partners. We may receive compensation when you click on links to those products or services.

Write for Us