What each account actually is
A 401(k) is a workplace retirement plan offered through your employer. You choose a contribution percentage; it comes out of every paycheck pre-tax (Traditional) or after-tax (Roth 401(k), if your plan offers it). Many employers match a percentage of contributions, that match is free, immediate 100% return.
An IRA (Individual Retirement Account) is set up by you, with you, at a brokerage like Fidelity, Schwab or Vanguard. It exists independent of your job. You can contribute as long as you have earned income.
2026 contribution limits side-by-side
- 401(k) employee limit: $23,500 (2026, IRS-adjusted); +$7,500 catch-up at age 50+; +$11,250 'super catch-up' for ages 60–63 under SECURE 2.0.
- IRA limit: $7,000 (under 50) / $8,000 (50+), combined across Roth and Traditional.
- Combined employer + employee 401(k) limit: $70,000 in 2026.
- Roth IRA income phase-out: ~$146K–$161K single / ~$230K–$240K married joint.
The optimal contribution order for almost everyone
- Step 1, 401(k) up to the full employer match. A typical 100% match on the first 6% is an immediate 100% risk-free return. Skip this and you're walking away from compensation.
- Step 2, Max your IRA ($7,000–$8,000). IRAs offer far more investment choice and lower expense ratios than most 401(k) menus. Roth if you're in the 12–22% bracket, Traditional if 32%+.
- Step 3, Return to the 401(k) and contribute up to the $23,500 cap. Tax shelter is too valuable to leave on the table.
- Step 4, If you have more to invest, look at HSA (if eligible), Backdoor Roth, then a taxable brokerage.
Investment choice and fees
401(k) menus typically offer 15–25 funds chosen by your employer's plan administrator. Quality varies wildly, some employers (Google, Microsoft) offer Vanguard institutional funds at 0.02%; others offer high-fee target-date funds at 0.80%+ that quietly cost you tens of thousands over a career.
An IRA at any major brokerage gives you access to thousands of mutual funds and ETFs at index-fund pricing. This is why step 2 in the order above is the IRA, fee control matters more than tax wrapper at this stage.
Vesting, portability and rollovers
- Your contributions to a 401(k) are always 100% yours immediately. The employer match may be subject to a vesting schedule (often 3–5 years).
- When you change jobs, you can roll an old 401(k) into your IRA (no tax) or into your new employer's 401(k).
- Cashing out a 401(k) when leaving a job triggers tax + 10% penalty before age 59½, and decades of forfeited compounding. Roll it; never cash it.
- IRAs go with you forever, they're not tied to any job.
When 401(k) wins
- There's an employer match (always, free money first).
- You're a high earner above the Roth IRA income limit and want pre-tax shelter.
- Your plan offers institutional-class funds at very low fees.
- You like automatic payroll deduction, no manual transfers required.
When IRA wins
- Your 401(k) menu is expensive (>0.50% expense ratios across the board).
- You want Roth access and your employer doesn't offer a Roth 401(k).
- You want broader fund/ETF choice, IRAs let you buy almost anything.
- You're self-employed and need a SEP IRA or Solo 401(k) instead.
