This article is educational information, not investment or tax advice. Contribution limits and tax rules change yearly and depend on your personal situation. Consider speaking with a licensed financial or tax advisor about your circumstances.
Once you’ve decided to start investing for retirement, the next question is where to put the money. The two main options are a 401(k) through your employer and an IRA (individual retirement account) you open yourself. They both offer valuable tax advantages — but they work differently, and for most people the smartest move uses both, in a specific order. Here’s how to think about it.
The quick version
A 401(k) is a retirement plan offered through your job. You contribute straight from your paycheck, and many employers match part of what you put in — free money you don’t get anywhere else.
An IRA is an account you open on your own at a brokerage. Nobody matches your contributions, but you get far more control over what you invest in and often lower fees.
The tax benefit is the shared headline: both let your money grow without being taxed year to year, which supercharges the compounding we covered in how to start investing: index funds for beginners.
How much you can contribute in 2026
This is where the accounts differ most. For 2026, the IRS limits are:
- 401(k): up to $24,500 per year from your paycheck. If you’re 50 or older, you can add an extra $8,000 (and those aged 60–63 can add $11,250 instead).
- IRA: up to $7,500 per year across all your IRAs combined. If you’re 50 or older, you can add an extra $1,100, for $8,600 total.
The 401(k)’s much higher ceiling is a big part of why it’s so powerful — you can shelter far more income from taxes each year. And importantly, you can contribute to both a 401(k) and an IRA in the same year, as long as you stay within each account’s limit.
Traditional vs. Roth: the tax timing choice
Both 401(k)s and IRAs come in two flavors, and the difference is when you pay tax:
- Traditional: you contribute pre-tax money now (lowering this year’s taxable income), and pay tax later when you withdraw in retirement. Good if you expect to be in a lower tax bracket later.
- Roth: you contribute after-tax money now, and withdrawals in retirement are completely tax-free. Good if you’re early in your career or expect to be in a higher bracket later.
A common rule of thumb: younger or lower-earning savers often lean Roth (pay the tax now while it’s cheap), while higher earners closer to retirement often prefer traditional. There’s no universally right answer — it depends on your tax situation now versus later.
One catch worth knowing: Roth IRAs have income limits. For 2026, the ability to contribute to a Roth IRA phases out between $153,000 and $168,000 for single filers, and between $242,000 and $252,000 for married couples filing jointly. Roth 401(k)s, by contrast, have no income limit.
The order most people should follow
Financial planners often suggest a priority sequence that squeezes the most value out of each account. A widely used version looks like this:
1. 401(k) up to the employer match. If your employer matches, say, 50% of your contributions up to 6% of your salary, contribute at least enough to capture the full match. This is an immediate, guaranteed return on your money — nothing else comes close, so it goes first.
2. Max out an IRA. Once you’ve grabbed the match, an IRA usually comes next because it gives you more investment choice and often lower fees than a typical workplace plan. Fill it up to the $7,500 limit if you can.
3. Back to the 401(k). Still have money to invest after maxing your IRA? Return to the 401(k) and contribute beyond the match, up to the $24,500 limit.
This order isn’t a law — it’s a sensible default. If your 401(k) has excellent low-cost fund options, you might weight it more heavily; if it has poor options and high fees, you might prioritize the IRA. What matters most is capturing any match first.
What you actually invest in
An important point that trips up beginners: a 401(k) or IRA is not an investment itself — it’s a container. Opening the account doesn’t grow your money; you still have to choose what to hold inside it. For most people, that’s the same low-cost index funds covered in how to start investing: index funds for beginners. The account provides the tax advantage; the index funds inside it do the growing.
The bottom line
For most people the answer to “401(k) or IRA?” isn’t either/or — it’s both, in order: capture the full employer match in your 401(k) first, then fund an IRA for its flexibility and lower costs, then come back to the 401(k) if you can save more. Decide between traditional and Roth based on whether you’d rather save on taxes now or in retirement. And remember that the account is only the wrapper — what you put inside it is what builds your retirement.
Just make sure the foundation comes first: an emergency fund: how much and where to keep it and clearing high-interest debt (see invest or pay off debt first) both come before you start locking money away for retirement.
Related reading: new to investing entirely? Start with how to start investing: index funds for beginners. Not sure whether to invest or tackle debt first? See invest or pay off debt first.
Sources
IRS — 401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500: https://www.irs.gov/newsroom/401k-limit-increases-to-24500-for-2026-ira-limit-increases-to-7500
Fidelity — 401(k) contribution limits 2026: https://www.fidelity.com/learning-center/smart-money/401k-contribution-limits
Fidelity — IRA contribution limits for 2026: https://www.fidelity.com/learning-center/smart-money/ira-contribution-limits
