A 401(k) and an IRA are both retirement accounts with tax advantages, and beginners often think they have to choose one. You usually don’t. They’re different tools that work best together, and the smartest move is knowing which to feed first.
The one-line difference: a 401(k) comes through your employer, often with free matching money and a high contribution limit. An IRA (individual retirement account) you open yourself at any brokerage, with far more investment choice but a lower limit. Most people who can should use both.
Here’s how each works, the 2026 numbers, and the priority order that gets the most out of both.
The 401(k): through your job, with a match
A 401(k) is offered by your employer. You pick a percentage of your pay, it comes out of every paycheck automatically, and it’s invested in the plan’s menu of funds. Three things make it powerful:
- The employer match. Many employers add their own money when you contribute - the closest thing to free money in personal finance. This alone is why the 401(k) usually goes first (full details here).
- A high contribution limit. For 2026 you can put in up to $24,500 of your own pay (from IRS Notice 2025-67), far more than an IRA allows.
- Automatic saving. Money you never see in your checking account is money you never skip. Payroll does the discipline for you.
The trade-offs: you’re limited to the funds your plan offers, and some plans carry higher fees than you’d pay on your own. You also generally need to leave the money alone until age 59 and a half, or face taxes plus a penalty.
The IRA: your own account, more choice
An IRA you open yourself at a brokerage - no employer needed. Anyone with earned income can have one. Its edge is freedom: you can invest in almost any stock, bond, or low-cost index fund, not just a preset menu, and you can shop for the cheapest provider.
The catch is a smaller limit. For 2026 the IRA contribution limit is $7,500 (from IRS Notice 2025-67), less than a third of the 401(k) limit. IRAs also come with income-based rules that 401(k)s don’t have - which we get to below.
The 2026 limits, side by side
| 401(k) | IRA | |
|---|---|---|
| 2026 contribution limit | $24,500 | $7,500 |
| Catch-up at 50 or older | $8,000 extra | $1,100 extra |
| Employer match | Often yes | No |
| Investment choice | Plan’s menu | Almost anything |
| Income limits to contribute | No | Yes, for Roth and for deducting traditional |
| Who offers it | Your employer | You open it yourself |
Two notes that matter. First, these are separate limits - you can contribute the full $24,500 to a 401(k) and the full $7,500 to an IRA in the same year. Second, both accounts come in traditional (tax break now, taxed later) and Roth (taxed now, tax-free later) flavors - that choice is covered in our traditional vs Roth guide and, for the Roth IRA specifically, in what is a Roth IRA.
The smart order to use them
Because the accounts have different strengths, there’s a priority order that squeezes the most out of each dollar. For most people it looks like this:
- 401(k) up to the full employer match. Contribute at least enough to capture every matched dollar. A 50% or 100% instant match beats anything else you can do with the money. Skipping it to fund an IRA first is almost always a mistake.
- Then an IRA, up to its limit. With the match captured, an IRA’s low fees and wide investment choice make it the next stop. Many people prefer a Roth IRA here for the tax-free growth.
- Then back to the 401(k), up to the annual limit. Once the IRA is maxed, keep filling the 401(k) toward its $24,500 ceiling.
- Then a taxable brokerage account, if you still have money to invest after both are full.
This order isn’t a law - if your 401(k) has excellent low-cost funds, you might favor it over the IRA in step 2. But “match first, then IRA, then max the 401(k)” is a reliable default.
A worked example
Say you earn $70,000 and can save $10,000 a year for retirement. Your employer matches 50% of contributions up to 6% of pay. Here’s how the order plays out:
- Step 1 - capture the match. 6% of $70,000 is $4,200. Contribute that to the 401(k), and your employer adds 50% of it: $2,100 of free money. Your $4,200 plus their $2,100 means $6,300 lands in the account from a $4,200 outlay.
- Step 2 - fund an IRA. You have $5,800 of your $10,000 left ($10,000 minus the $4,200). Put $5,800 into an IRA, invested in low-cost index funds of your choice. (You could go up to the $7,500 IRA limit if you had more to save.)
- Result. You contributed $10,000 of your own money, captured $2,100 from your employer, and spread it across two accounts - the 401(k) for the match, the IRA for the investment freedom. Total working for you this year: $12,100.
That $2,100 match is an instant 50% return on those dollars in year one - no investment reliably offers that. See how contributions like these compound over decades in the compound interest calculator, and model your full retirement picture in the retirement calculator.
Where the IRA’s income rules bite
The IRA’s one real complication is income limits, which the 401(k) doesn’t have:
- Roth IRA: if your income is above a yearly threshold, your allowed Roth IRA contribution shrinks and eventually hits zero. The 2026 phase-out starts at $153,000 of income for single filers and $242,000 for married couples filing jointly. Details in what is a Roth IRA.
- Traditional IRA deduction: you can always contribute, but whether the contribution is tax-deductible can phase out at higher incomes if you (or your spouse) also have a workplace plan.
A 401(k) has no such income ceiling - high earners can contribute the full amount regardless. If your income is above the Roth IRA cutoff, that’s often a reason to lean harder on the 401(k), or to look into a “backdoor Roth” (a legal workaround worth researching with the current IRS rules).
Common mistakes to avoid
Skipping the match to fund an IRA first. This is the big one. An IRA has real advantages - lower fees, wider investment choice - but none of them beats a 50% or 100% employer match in year one. Sending your first retirement dollars to an IRA while leaving match money on the table means turning down an instant, near-guaranteed return to chase a smaller long-term edge. Capture the full match in the 401(k), then move to the IRA. The one time to flip the order is if your employer offers no match at all.
Forgetting the vesting schedule when you change jobs. Your own contributions are always 100% yours. Employer match money often isn’t - many plans vest it over a period of years, and if you leave before you’re fully vested, you forfeit the unvested part. It’s worth checking your vesting status before you time a job change; staying a few extra months can occasionally mean keeping thousands of dollars of match you’d otherwise walk away from.
Botching a 401(k) rollover by taking the check yourself. When you leave a job and move your 401(k), how you move it matters. Ask for a direct rollover, where the money goes straight from the old plan into the new account. If you instead take the money as a check made out to you - an indirect rollover - the plan must withhold 20% for taxes, and you then have just 60 days to deposit the full amount, including that withheld 20% from your own pocket, or the shortfall is treated as a taxable withdrawal (plus a 10% penalty if you’re under 59 and a half). On a $40,000 balance that’s $8,000 withheld and a 60-day scramble. A direct rollover avoids all of it.
FAQ
Can I contribute to both a 401(k) and an IRA in the same year?
Yes. They have completely separate limits - $24,500 for the 401(k) and $7,500 for the IRA in 2026. The only catch is that an IRA has income-based rules (for Roth eligibility and for deducting a traditional contribution) that a 401(k) doesn’t.
Which should I fund first?
Contribute to your 401(k) at least up to the full employer match first - that’s free money nothing else can match. After that, an IRA’s lower fees and wider investment choice usually make it the next stop, before you go back to fill the 401(k) toward its limit.
What if my job doesn’t offer a 401(k)?
Then an IRA is your main tax-advantaged retirement account - open one at any brokerage and contribute up to $7,500 for 2026. Some workers without a 401(k) also qualify for other plans (like a SEP or SIMPLE IRA if self-employed); check the current IRS options for your situation.
Is a Roth or traditional version better?
That’s a separate question from 401(k) vs IRA, and it comes down to whether you want your tax break now (traditional) or in retirement (Roth). Our traditional vs Roth guide walks through how to choose.
Sources
- IRS Notice 2025-67 - 2026 limits: $24,500 for 401(k), $7,500 for IRA, plus catch-up amounts and Roth IRA income phase-out thresholds
- IRS - overview of 401(k) plans and individual retirement arrangements (irs.gov)
- IRS - rollovers of retirement plan and IRA distributions: a distribution paid to you is subject to mandatory 20% withholding, with 60 days to complete the rollover; a direct (trustee-to-trustee) rollover avoids the withholding (irs.gov)
- The salary, saving, match, and rollover figures in the worked examples are illustrative
- Investment returns are not guaranteed; check current-year limits and income thresholds with the IRS before acting
- Last reviewed July 5, 2026. This guide is general education, not personalized financial advice.
