401(k) vs IRA: Which Retirement Account Should You Use?
A 401(k) and an IRA are both tax-advantaged retirement accounts, but they differ in who controls them, how much you can contribute, and whether anyone matches your savings. Understanding the tradeoffs helps you decide where to put the first, most valuable dollars of each paycheck.
What Each Account Is
A 401(k) is an employer-sponsored plan. You contribute pre-tax directly from payroll, the money grows tax-deferred, and you owe income tax on withdrawals in retirement. Many employers match a portion of what you contribute — effectively free money.
A Traditional IRA is an individual account you open on your own at a brokerage. Contributions are often tax-deductible, but deductibility phases out if you or your spouse are covered by a workplace plan. A Roth IRA takes after-tax contributions; withdrawals in retirement are tax-free.
Annual contribution limits for 401(k) plans are several times higher than IRA limits, and 401(k) values rise with each IRS inflation adjustment while catch-up contributions kick in at age 50.
How to Prioritize
A common ordering: contribute to the 401(k) up to the employer match (it's an instant return on investment), then fund a Roth IRA for tax-free growth and flexibility, then return to the 401(k) for additional savings. An emergency fund always takes precedence — qualified accounts lock money up until a certain age.
This article is general information and not financial advice. Contribution limits and rules change yearly; confirm current figures and consult a qualified advisor for your situation.