401(k) vs IRA: Retirement Accounts Compared

In the US, 401(k) and IRA accounts are the two main retirement vehicles. They are not interchangeable, and most workers benefit from both.

401(k): Through Your Employer

A 401(k) is set up by your employer. Money comes out before taxes (traditional) or after (Roth) directly from your paycheck.

2026 contribution limits:

• Employee: $23,500 (under 50) / $31,000 (50+)
• Combined employer + employee: $70,000

Pros:

• Employer match — typically 3-6% of salary, free money
• Higher contribution limits than IRA
• Automatic payroll deduction reduces decision fatigue

Cons:

• Limited investment menu chosen by employer
• Fees vary widely; some plans have expense ratios over 1%
• Cannot access without 10% penalty before 59½ (with exceptions)

IRA: You Open It Yourself

An IRA is opened at any brokerage. You control the investments.

2026 contribution limits:

• $7,500 (under 50) / $8,500 (50+)
• Roth IRA phases out above income limits ($165k single, $246k joint)

Pros:

• Any investment available (low-cost index funds, individual stocks, ETFs)
• Cheap or free at major brokerages
• Roth IRA allows tax-free withdrawals in retirement

Cons:

• Lower contribution limits
• No employer match
• Roth income limits restrict high earners

Roth vs Traditional

• Traditional: deduct now, pay tax on withdrawal. Better if you expect lower tax bracket in retirement.
• Roth: pay tax now, withdraw tax-free. Better for younger workers and those expecting higher future tax rates.

The Standard Order

1. Contribute to 401(k) up to employer match (free money) 2. Max out Roth IRA if eligible 3. Return to 401(k) and max it out 4. After-tax brokerage for additional savings

Backdoor Roth

High earners locked out of direct Roth IRA contributions can convert from a traditional IRA. Tax mechanics are subtle; consult a professional.

Educational only. Not financial advice. Tax laws and limits change; verify current numbers with the IRS or a CPA.