401(k) vs. IRA: Differences and Which to Use First

A 401(k) and an individual retirement account (IRA) are both tax-advantaged ways to save for retirement. Many people use both. The main differences are who offers the account, how much you can put in and what you can invest in.

401(k): through your employer

• Offered by employers; contributions come straight out of your paycheck.
• Higher contribution limits than an IRA, plus catch-up contributions from age 50.
• Employer match: many employers add money when you contribute, for example 50 cents for every dollar up to a percentage of your salary.
• Investment choices are limited to the plan's menu, often a set of mutual funds and target-date funds.
• Fees vary widely by plan.
• Many plans offer both traditional (pre-tax) and Roth (after-tax) versions.

IRA: you open it yourself

• Opened at any broker; you need earned income to contribute.
• Lower contribution limits than a 401(k).
• Almost unlimited investment choice: individual stocks, ETFs, mutual funds and bonds.
• Often very low or no account fees.
• Comes in traditional and Roth versions. See Roth vs. traditional IRA.

Contribution limits are set by the IRS and change most years. Check IRS.gov for the current figures.

The order many people follow

1. Contribute to your 401(k) up to the full employer match. The match is an immediate return you won't get anywhere else.
2. Fund an IRA, often a Roth if you're eligible, for wider investment choice and low fees.
3. Go back to the 401(k) and contribute more, up to the limit if you can.
4. Invest in a regular taxable brokerage account once tax-advantaged space is used up. See what is a brokerage account.

This is a common rule of thumb, not a rule. If your 401(k) has excellent low-cost funds, you might prioritize it further.

When you leave a job

You can usually leave your old 401(k) where it is, move it to your new employer's plan or roll it into an IRA. A direct rollover avoids taxes and penalties and often gives you more investment choices and lower fees.

What to invest in

Inside either account, low-cost diversified funds are a popular core. See what is an ETF, asset allocation by age and how to diversify. To check whether you're on track, try the retirement calculator.

This article is educational and not tax or investment advice. Rules change; check IRS.gov or a professional for your situation.

Frequently asked questions

Can I have a 401(k) and an IRA at the same time?

Yes. Many people contribute to both. However, if you or your spouse have a workplace plan, your ability to deduct traditional IRA contributions may be limited depending on your income.

Should I contribute to my 401(k) or IRA first?

A common approach is to contribute to your 401(k) up to the full employer match first, then fund an IRA, then return to the 401(k).

What happens to my 401(k) when I leave my job?

You can usually leave it in the old plan, move it to your new employer's plan or roll it into an IRA. A direct rollover avoids taxes and penalties.