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IRA vs. 401(k): Differences, How to Choose

IRAs and 401(k)s both have tax benefits for retirement savers. Get your 401(k) match, then max out your IRA.

IRA vs. 401(k): Key Differences

IRAs and 401(k)s may be two of the most popular retirement accounts for their tax advantages, but they each have several key differences. These distinctions, as well as your financial ability and goals, may influence which account you prioritize or how you plan your contributions to both.

The main difference? 401(k)s are offered through employers, while IRAs are opened by individuals through a broker or a bank. Here's what else you need to know.

IRA vs. 401(k): Overview

Choosing between an IRA and a 401(k)

Hats off to you if you have the means to max out both a 401(k) and a traditional IRA or Roth IRA. If not, this roadmap will help you prioritize your dollars. Here’s a quick way to decide where to contribute first:

  • 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. .

  • 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. .

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.

  • A

    traditional IRA

    is ideal for those who favor an immediate tax break. Contributions may be deductible, which means your taxable income for the year is reduced by the amount of your contribution. But, if you're also covered by a 401(k), your deduction may be reduced or eliminated based on income. If you (or your spouse) have a workplace retirement plan, check out the IRA limits.

  • A

    Roth IRA

    is a good choice if you’re not eligible to deduct traditional IRA contributions or if you don't mind giving up the IRA's immediate tax deduction in exchange for tax-free growth on your investments and tax-free withdrawals in retirement. Roth IRA eligibility is not affected by participation in a 401(k), but there are income limits. You can see the latest Roth rules on our IRA limits page.

» 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.

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