Side-by-Side Comparison (2026)
| Feature | 401(k) | IRA |
|---|---|---|
| Annual Contribution Limit | $23,500 | $7,000 |
| Catch-up (Age 50+) | +$7,500 | +$1,000 |
| Employer Matching | Yes (often 3-6%) | No |
| Tax Deduction | Always (pre-tax) | Depends on income/plan |
| Investment Options | Limited (employer-chosen) | Wide (stocks, ETFs, bonds) |
| Roth Option Available | Yes (Roth 401(k)) | Yes (Roth IRA) |
| Required Minimum Distributions | Yes, at age 73 | Traditional: Yes. Roth: No |
| Early Withdrawal Penalty | 10% + tax before 59½ | 10% + tax before 59½ |
| Loan Against Balance | Yes (up to 50%) | No |
| Who Can Open | Employees with employer plan | Anyone with earned income |
The 401(k) Advantage: Employer Match
The single biggest advantage of a 401(k) is employer matching. This is literally free money added to your retirement savings.
Common matching formulas:
- Dollar-for-dollar up to 3%: You contribute 3% of salary, employer adds another 3%
- 50 cents per dollar up to 6%: You contribute 6%, employer adds 3%
- 100% match up to 4%: You contribute 4%, employer doubles it
💡 Never Leave Free Money on the Table
If your employer matches up to 6% and you only contribute 3%, you are giving up thousands of dollars per year in free money. On an $80,000 salary with a 50% match up to 6%, you are leaving $2,400/year on the table. Over 30 years at 8% growth, that is approximately $270,000 in lost retirement wealth.
The IRA Advantage: Investment Freedom
A 401(k) limits you to 15-30 investment options chosen by your employer's plan administrator. Many have high-fee funds. An IRA (opened at Fidelity, Schwab, Vanguard, etc.) gives you access to:
- Thousands of low-cost index funds and ETFs
- Individual stocks and bonds
- REITs, international funds, sector funds
- Target-date funds with lower expense ratios than typical 401(k) options
The expense ratio difference matters enormously over decades. A 401(k) fund charging 0.80% vs an IRA fund at 0.05% costs approximately $100,000+ more over a 30-year career on a $500,000 balance.
Traditional vs Roth — The Tax Decision
Both 401(k) and IRA come in Traditional and Roth versions:
| Feature | Traditional | Roth |
|---|---|---|
| Tax on Contributions | Tax-deductible now | No deduction (after-tax) |
| Tax on Withdrawals | Taxed as income | Completely tax-free |
| Tax on Growth | Deferred (taxed at withdrawal) | Tax-free forever |
| Best If... | Current tax rate > retirement rate | Current tax rate < retirement rate |
| RMDs Required? | Yes, at 73 | IRA: No. 401(k): Yes* |
*Roth 401(k) RMDs can be avoided by rolling into a Roth IRA before retirement.
Roth IRA Income Limits (2026)
Roth IRA contributions are limited by income:
- Single filers: Full contribution if MAGI < $150,000. Phase-out between $150K-$165K. No contribution above $165K.
- Married filing jointly: Full contribution if MAGI < $236,000. Phase-out between $236K-$246K.
If your income exceeds these limits, you can use the Backdoor Roth IRA strategy: contribute to a non-deductible Traditional IRA, then convert it to a Roth IRA. This is legal and widely used by high-income earners.
The Optimal Strategy
- Step 1: Contribute to your 401(k) up to the full employer match (never less)
- Step 2: Max out your Roth IRA ($7,000/year) — tax-free growth and no RMDs
- Step 3: Go back to your 401(k) and contribute up to the $23,500 limit
- Step 4: If you have money left, use a taxable brokerage account
⚠️ Vesting Schedules
Employer matching contributions often come with a vesting schedule — you might need to stay 3-6 years to fully own the matched funds. If you leave before fully vesting, you forfeit the unvested portion. Check your plan's vesting schedule before assuming the full match is yours.
How Much Can You Accumulate?
Assuming 8% average annual return and maxing out contributions every year:
| Starting Age | 401(k) at 65 | IRA at 65 | Combined |
|---|---|---|---|
| 25 (40 years) | $6.1M | $1.8M | $7.9M |
| 30 (35 years) | $4.0M | $1.2M | $5.2M |
| 35 (30 years) | $2.6M | $0.8M | $3.4M |
| 40 (25 years) | $1.7M | $0.5M | $2.2M |
These projections assume current contribution limits and exclude employer matching (which adds significantly more). Starting even 5 years earlier can mean $1M+ more at retirement.
Project Your 401(k) Growth
Enter your salary, contribution rate, and employer match — see your projected retirement balance.
Use 401(k) Calculator →How We Research and Update This Guide
We review current federal guidance, plan limits, lender documentation, and publicly available source material before revising calculations or examples.
- Federal thresholds, contribution limits, and lender or plan references are reviewed before revising the guide.
- Examples are recalculated and matched against the related tool or amortization logic used on the site.
- State-specific edge cases are separated from federal guidance where possible to reduce ambiguity.
Frequently Asked Questions — 401(k) vs IRA
Yes. You can contribute to both a 401(k) and an IRA in the same year. However, if you have a workplace 401(k) and your income exceeds certain limits, your traditional IRA contributions may not be tax-deductible. Roth IRA contributions have separate income limits. The ideal strategy is to contribute to your 401(k) up to the employer match, then max out your IRA, then go back to the 401(k) up to the annual limit.
Employer matching means your company contributes additional money to your 401(k) based on your own contributions. A common match is 50% of your contributions up to 6% of salary. For example, if you earn $80,000 and contribute 6% ($4,800), your employer adds $2,400. This is essentially free money with a 50% instant return — always contribute at least enough to get the full match.
Traditional (401(k) or IRA): You contribute pre-tax dollars, reducing your taxable income now. You pay income tax when you withdraw in retirement. Roth: You contribute after-tax dollars (no tax break now), but all withdrawals in retirement are completely tax-free — including all investment gains. Choose Roth if you expect to be in a higher tax bracket in retirement; choose Traditional if you expect a lower bracket.
Both 401(k) and IRA have a penalty-free withdrawal age of 59½. Withdrawals before that age incur a 10% early withdrawal penalty plus income tax. Exceptions exist for first-time home purchase ($10,000 from IRA), disability, certain medical expenses, and 72(t) substantially equal periodic payments. Roth IRA contributions (not earnings) can be withdrawn tax- and penalty-free at any time.
You have four options: (1) Roll it over to your new employer's 401(k), (2) Roll it into a Traditional IRA (most common — gives you more investment options), (3) Leave it with your old employer (if allowed), or (4) Cash it out (not recommended — triggers taxes and 10% penalty if under 59½). A direct rollover to an IRA is typically the best choice for flexibility and investment options.