401(k) vs IRA: Complete Guide to Retirement Accounts

Quick Comparison Overview

Feature	401(k)	Traditional IRA	Roth IRA
2024 Contribution Limit	$23,000 ($30,500 if 50+)	$7,000 ($8,000 if 50+)	$7,000 ($8,000 if 50+)
Employer Match	✓ Often Available	✗ Not Available	✗ Not Available
Tax Treatment	Pre-tax or Roth	Pre-tax	After-tax
Income Limits	None	For deductibility	Yes, strict limits
Investment Options	Limited by plan	Unlimited	Unlimited
RMDs at 73	Yes (unless working)	Yes	No

The choice between a 401(k) and IRA isn't necessarily either/or – many successful retirement strategies use both. Understanding the unique advantages of each helps you optimize your retirement savings and minimize taxes throughout your lifetime.

401(k) Plans: The Employer-Sponsored Powerhouse

401(k) Advantages

• Higher contribution limits ($23,000 vs $7,000)
• Employer matching (free money!)
• Automatic payroll deductions
• Loan options available
• Creditor protection under ERISA
• No income limits for contributions
• Both traditional and Roth options often available

401(k) Disadvantages

• Limited investment choices
• Higher fees in some plans
• Early withdrawal penalties
• RMDs required at 73 (unless still working)
• Vesting schedules for employer contributions
• Limited access before 59½
• Plan rules vary by employer

The Power of Employer Matching

If your employer offers a 50% match on the first 6% of salary, and you earn $60,000, contributing $3,600 gets you $1,800 in free money. That's an instant 50% return on investment – unbeatable by any market!

IRAs: Flexibility and Control

Traditional IRA Deep Dive

Tax Deductibility Income Limits (2024)

Single filers with workplace plan: Full deduction up to $77,000 MAGI, phases out by $87,000
Married filing jointly (contributor has workplace plan): Full deduction up to $123,000, phases out by $143,000
No workplace plan: No income limits for deductibility

Best For:

• High earners above Roth limits
• Those expecting lower tax bracket in retirement
• People without 401(k) access

Consider:

• RMDs start at age 73
• Withdrawals taxed as ordinary income
• 10% penalty before 59½

Roth IRA: Tax-Free Growth Machine

Income Limits (2024)

Single filers: Full contribution up to $153,000 MAGI, phases out by $161,000
Married filing jointly: Full contribution up to $240,000, phases out by $250,000

Unique Benefits:

• Tax-free withdrawals in retirement
• No RMDs during owner's lifetime
• Contributions accessible anytime
• Estate planning advantages

5-Year Rules:

• Account must be 5 years old for tax-free earnings
• Each conversion has its own 5-year clock
• Applies even after 59½

Strategic Combinations and Advanced Tactics

The Optimal Order of Operations

1
401(k) to employer match: Never leave free money on the table
2
Max out HSA: Triple tax advantage if eligible
3
Max out Roth IRA: If under income limits (or use backdoor Roth)
4
Max out 401(k): $23,000 limit provides substantial tax savings
5
After-tax 401(k) for mega-backdoor Roth: If plan allows
6
Taxable brokerage account: For additional savings

Advanced Strategies

Backdoor Roth IRA

High earners above Roth income limits can contribute to a traditional IRA (non-deductible) and immediately convert to Roth. Watch out for the pro-rata rule if you have existing traditional IRA balances.

Mega-Backdoor Roth

Some 401(k) plans allow after-tax contributions beyond the $23,000 limit (up to $69,000 total in 2024). These can be converted to Roth, creating massive tax-free growth potential.

Roth Conversion Ladders

Early retirees can convert traditional funds to Roth during low-income years, then access the converted principal penalty-free after 5 years.

Decision Framework: Which Is Right for You?

Choose 401(k) When:

✓ Your employer offers matching contributions
✓ You want to save more than $7,000 annually
✓ You need automatic payroll deductions for discipline
✓ You might need loan options
✓ You earn too much for deductible IRA or Roth IRA

Choose IRA When:

✓ You want more investment options
✓ Your 401(k) has high fees
✓ You've maxed out 401(k) matching
✓ You're self-employed or don't have a 401(k)
✓ You want Roth benefits and are under income limits

Use Both When:

✓ You want to maximize tax-advantaged savings
✓ You need tax diversification in retirement
✓ You want both current deductions and future tax-free income
✓ You're pursuing FIRE (Financial Independence, Retire Early)

Common Mistakes to Avoid

❌ Not getting full employer match

Missing out on thousands in free money annually

❌ Ignoring vesting schedules

Losing employer contributions when changing jobs

❌ Paying high 401(k) fees

Reducing returns by 1-2% annually adds up to hundreds of thousands

❌ Not diversifying account types

Missing tax optimization opportunities in retirement

❌ Early withdrawals

10% penalty plus taxes can eat up 40% of withdrawal

❌ Forgetting about old 401(k)s

Lost accounts, continued fees, missed growth opportunities

Take Action Today

The best retirement account is the one you actually use. Start with your employer's 401(k) match, then expand to IRAs for greater flexibility. Every year you delay costs you valuable compound growth.

Calculate Your Retirement Needs →

401(k) vs IRA: Complete Comparison Guide