401(k) vs. IRA: where should your money go first?

Both 401(k)s and IRAs help you save for retirement with tax advantages — but they are not interchangeable. Contribution limits, employer matches, investment menus, and income rules differ. For most workers, the best order is not “pick one” but fund each in a sequence that captures free match money first, then tax-efficient space, then additional deferrals.

This guide walks through how the two account types compare, the 2025 limits, a concrete funding example at a $75,000 salary, and the situations where you should reverse the usual order — including high-fee 401(k)s, Roth income limits, and the backdoor Roth workaround. The goal is a practical sequence you can follow year after year, not a one-size-fits-all rule that ignores your employer plan.

The core difference

• 401(k): employer-sponsored; higher limits; often includes employer match^[3]
• IRA: individual account; lower limits; broader investment choices^[1]

A 401(k) is tied to your job. You enroll through payroll, contributions come out before you see your paycheck, and your employer sets the investment menu and (sometimes) the default fund. An IRA is yours regardless of employer: you open it at a brokerage or bank, choose from thousands of funds and ETFs, and contribute directly up to the annual cap. Many people use both over a career — the question is priority, not either-or.

Both account types come in traditional (pre-tax contributions, taxable withdrawals in retirement) and Roth (after-tax contributions, tax-free qualified withdrawals) versions. Employer plans may also offer after-tax 401(k) deferrals for mega backdoor strategies, but that is plan-specific. IRAs give you more control over fees and asset location; 401(k)s give you higher limits and, frequently, matching dollars you cannot replicate elsewhere.

2025 contribution limits

• 401(k): $23,500 ($31,000 if age 50+)^[2]
• IRA (traditional + Roth combined): $7,000 ($8,000 if 50+)^[2]
• Roth IRA income limits: phase-out $150,000–$165,000 (single) / $236,000–$246,000 (MFJ)^[4]

The 401(k) employee deferral limit applies only to what you contribute from your paycheck. Employer matching and nonelective contributions count toward a separate, much higher annual limit ($70,000 combined in 2025 for most plans, including all sources).^[3] Your match does not reduce how much you can defer — it adds on top.

IRA limits are shared across all traditional and Roth IRAs you own. You cannot put $7,000 in each; the $7,000 cap is total. Traditional IRA deductibility has its own income limits if you or a spouse are covered by a workplace plan.^[1] Roth IRA contributions are blocked above the phase-out range unless you use a backdoor strategy (covered below).

The recommended order (for most people)

1. Contribute to 401(k) up to the full employer match — often a 50–100% instant return. See 401(k) employer match explained.
2. Max a Roth IRA if income-eligible — tax-free growth
3. Return to the 401(k) and contribute up to the annual limit
4. If still saving: taxable brokerage account

Step one is non-negotiable for anyone with a match: skipping it is leaving compensation on the table. Step two favors Roth IRAs when you expect your tax rate in retirement to be equal to or higher than today, and when you want access to a broad, low-cost fund menu. Step three fills the larger 401(k) bucket once the IRA is maxed. Step four is for surplus savings after tax-advantaged space is exhausted.

Some planners insert an HSA before or after the Roth IRA if you have a high-deductible health plan — triple tax advantage on qualified medical expenses makes it one of the most efficient accounts available. Model HSA growth with the HSA calculator and compare it against your IRA funding timeline. HSAs are individual accounts like IRAs, but eligibility depends on your health coverage, not just income.

Worked example: $75,000 salary and typical match tiers

Consider a single filer earning $75,000 with a common match formula: 100% of the first 3% of salary, then 50% of the next 2%(sometimes written as “100% up to 3%, 50% up to 5%”). To capture the full match, you must defer 5% of pay — $3,750 per year. The employer adds $3,000 (100% × $2,250 on the first 3%, plus 50% × $1,500 on the next 2%).

That $3,000 match is a 80% return on your $3,750 deferral in year one alone, before investment growth. No fund in your IRA will reliably beat that on day one. After hitting 5%, this worker might redirect the next dollars to a Roth IRA ($7,000 max in 2025), then resume 401(k) deferrals toward the $23,500 employee limit — roughly $16,750 more from payroll if they can afford it.

At $75,000, this person is nowhere near the Roth IRA income ceiling, so a direct Roth contribution works without workaround strategies. Total retirement savings in this example could reach $33,750 per year ($3,750 + $3,000 match + $7,000 IRA + $20,000 more 401(k)) if cash flow allows — a aggressive but illustrative ceiling for a mid-level salary.

Traditional vs. Roth within each account type

Both 401(k)s and IRAs offer traditional (pre-tax) and Roth (after-tax) flavors. Current vs. future tax rates drive the choice. Read Roth vs. traditional IRA and use the Roth vs. traditional IRA calculator.

Traditional contributions reduce taxable income today; you pay ordinary income tax on withdrawals in retirement. Roth contributions do not reduce current taxes, but qualified withdrawals — including investment growth — are tax-free.^[1]Younger workers in lower brackets often favor Roth; peak earners nearing retirement may prefer traditional deferrals to reduce today’s marginal rate.

You can split: Roth IRA after capturing the 401(k) match, traditional 401(k) deferrals above that if you want the immediate tax break. Or Roth 401(k) deferrals if your plan offers them — same tax treatment as a Roth IRA but subject to the higher 401(k) limit. Tax diversification (holding both traditional and Roth balances) gives flexibility when managing retirement income and Required Minimum Distributions later.

Investment choices, plan fees, and rollovers

401(k): limited to employer plan funds — often 15–30 options. IRA: access to stocks, ETFs, bonds, and mutual funds across the market. If your 401(k) offers only high-fee funds, see investment fees explained.

Expense ratios inside 401(k)s vary widely. Passive index funds may charge 0.05%–0.20%; actively managed or annuity-wrapped options can exceed 1% annually. A 0.75% fee gap on a $100,000 balance costs $750 per year in drag — compounding over decades. That is one reason to fund an IRA next: you can buy identical index ETFs at rock-bottom cost while still using the 401(k) for match and higher deferral limits.

When you leave a job, you generally have four options for an old 401(k): leave it in the plan, roll it to your new employer’s plan, roll it to an IRA, or cash out (cash out triggers taxes and often a 10% early withdrawal penalty before age 59½).^[3] Rolling to an IRA usually expands investment choice and can lower fees; rolling to a new 401(k) can make sense if the new plan is excellent or you want creditor protection that varies by state. Avoid cashing out small balances out of convenience — the tax hit is permanent.

If you have both traditional and Roth dollars in a 401(k), rollovers must go to the matching account type (traditional to traditional IRA or 401(k), Roth to Roth IRA or Roth 401(k)). Mixing them incorrectly creates a taxable event. Keep statements from each employer plan until rollovers settle.

Backdoor Roth when you earn above the income limit

Direct Roth IRA contributions phase out and then disappear above the income thresholds.^[4] High earners who still want Roth tax treatment may use a backdoor Roth: contribute to a traditional IRA (non-deductible if income is too high), then convert those dollars to Roth shortly after. There is no income limit on conversions.^[1]

The backdoor is not a loophole — it is an allowed sequence — but it has pitfalls. The IRS pro-rata rule taxes conversions proportionally if you hold other traditional IRA balances with pre-tax dollars. Existing IRA money can make much of the conversion taxable. Some planners roll pre-tax IRA assets into a 401(k) that accepts rollovers to clear the pro-rata calculation before converting.

Larger conversions — moving big traditional 401(k) or IRA balances to Roth — trigger immediate tax on the converted amount. Model multi-year conversion schedules with the Roth conversion calculator before committing. Conversions make sense when you expect higher future tax rates, want to reduce RMDs later, or have a low-income year that keeps the conversion tax manageable.

When an IRA alone is better — and when to flip the order

If your 401(k) has no employer match and high-expense funds, maxing an IRA first can reduce fees while preserving tax-advantaged space. Still use the 401(k) after the IRA if you have additional capacity — the higher limit matters for heavy savers.

Flip the usual order when the 401(k) match is weak or absent and fund expenses are egregious — fund the IRA to $7,000, then return to the 401(k) for additional deferrals. Also flip (partially) when your plan lacks a Roth 401(k) option but you want Roth exposure and are under the Roth IRA income limit: IRA Roth first, then traditional 401(k) deferrals.

Do not flip step one: even a modest match (50% up to 4%, for example) usually beats fee savings on the first dollars saved. Run the numbers — a 50% match on 4% of $75,000 is $1,500 in free money versus perhaps $30–$50 per year saved by avoiding a 0.40% fee on $3,000 in an IRA. Match wins unless it is truly zero.

Other reasons to prioritize the 401(k) after the match: you need the higher deferral limit to hit a savings target, your plan offers institutional share classes with fees lower than retail IRAs, or you want payroll automation and will not actually fund an IRA without it. The “right” order is the one you will execute consistently.

Project balances with the 401(k) contribution calculator and retirement projection calculator. For match formulas and vesting, read 401(k) employer match explained.