401(k) vs IRA

A 401(k) is an employer-sponsored retirement savings plan that lets you contribute a portion of your paycheck before taxes (Traditional) or after taxes (Roth). The money grows tax-deferred or tax-free, depending on which type you choose, and you generally can't touch it until age 59.5 without a 10% penalty.

The name comes from Section 401(k) of the Internal Revenue Code — because nothing says “accessible financial planning” like naming your retirement vehicle after a tax code subsection.

In 2026, you can contribute up to $23,500 per year ($31,000 if you're 50 or older). Your employer may also match a portion of your contributions — this is literally free money added on top of your limit.

Many employers now offer both Traditional and Roth 401(k) options. You can even split your contributions between them — contributing some pre-tax and some after-tax in the same year. Your total across both cannot exceed the $23,500 limit.

An Individual Retirement Account (IRA) is a retirement savings account you open on your own — not through an employer. You choose your broker (Fidelity, Vanguard, Schwab, etc.), you choose your investments, and you control everything. The 2026 contribution limit is $7,000 per year ($8,000 if 50 or older).

There are two main types: Traditional IRA (tax-deductible contributions, taxed withdrawals) and Roth IRA (after-tax contributions, tax-free withdrawals). The Roth IRA is generally the better choice for most people, but it has income limits that can block high earners from contributing directly.

The biggest advantage of an IRA over a 401(k) is investment freedom. Your 401(k) might offer 25 mutual funds picked by your HR department. Your IRA gives you access to thousands of ETFs, individual stocks, bonds, REITs, and more. Lower fees, better options, full control.

For a complete breakdown of Traditional vs Roth IRA — income limits, conversion strategies, the Backdoor Roth, and which one wins at every income level — check out the Roth IRA vs Traditional IRA deep dive.

Let's do the math on why you should never leave employer match on the table.

According to the Bureau of Labor Statistics, roughly one in four workers with access to a 401(k) match doesn't contribute enough to get the full match. Collectively, Americans leave an estimated $24 billion in employer matches on the table every year. That's $24 billion in free money — unclaimed.

Even if your 401(k) has high fees and mediocre fund options, the employer match more than compensates. A fund with a 1% expense ratio and a 50% employer match still destroys a zero-fee IRA with no match. Always capture the full match first. Optimize later.

Having both a 401(k) and an IRA isn't an either/or situation — it's the ideal setup. They serve different purposes and complement each other perfectly.

Your 401(k) is your workhorse: high contribution limits, employer match, automatic payroll deductions that enforce discipline. But the fund choices are limited to whatever your employer picked, and fees can be higher than you'd like.

Your IRA is your precision tool: total investment freedom, typically lower fees, and (for Roth IRAs) unmatched withdrawal flexibility. The contribution limit is lower, but the quality of your investing is higher.

This is called asset location — putting the right investments in the right accounts to minimize taxes. It sounds minor, but studies show proper asset location can add 0.25-0.75% to your annual returns. Over 30 years, that compounds into tens of thousands of dollars.

One important caveat: if you have a Traditional 401(k) and want a Traditional IRA deduction too, your IRA deduction may be reduced or eliminated depending on your income. Single filers with a workplace plan lose the deduction above $89,000 MAGI in 2026. This is another reason most people are better off with a Roth IRA (no deduction needed — the benefit is tax-free growth).

If you're self-employed, a freelancer, or a 1099 contractor, you don't have an employer to offer you a 401(k). But you can create your own — and the limits are actually more generous than a regular 401(k).

Bottom line: If you're a solo freelancer or single-member LLC, the Solo 401(k) is almost always better. You get higher contribution limits at lower income levels, a Roth option, and loan access. The SEP IRA wins on simplicity if you have employees (since you must contribute equally for all employees in a SEP, which gets expensive, but the Solo 401(k) isn't available if you have non-spouse employees).

A self-employed person earning $100,000 in net SE income can contribute roughly $43,500 to a Solo 401(k) ($23,500 + ~$20,000 employer portion) compared to only ~$20,000 in a SEP IRA. That's more than double the tax-advantaged savings.

When you leave a job, your 401(k) doesn't disappear — but it does become an orphan. Your old employer isn't going to optimize it for you. In most cases, rolling it into an IRA is the smart move.

When to Roll Over

• You left your job — roll to an IRA for better options and lower fees.
• Your old plan has high fees — many small-company 401(k)s charge 1-2% annually. An IRA at Fidelity or Vanguard can cut that to 0.03-0.10%.
• You want to consolidate — if you have four old 401(k)s from four jobs, roll them all into one IRA. Simpler to manage, rebalance, and track.
• You want Roth conversion — rolling to a Traditional IRA first, then converting to Roth over multiple years, lets you spread the tax hit.

When NOT to Roll Over

• You plan to do Backdoor Roth — having a pre-tax IRA balance triggers the pro-rata rule, which makes Backdoor Roth conversions partially taxable. If you're a high earner doing Backdoor Roth, keep pre-tax money in the 401(k).
• Your old plan has institutional funds — some large employers negotiate expense ratios of 0.01-0.02%. You can't get those in a retail IRA.
• You need creditor protection — 401(k)s have stronger federal (ERISA) protection from lawsuits and creditors than IRAs, which vary by state.
• You might retire between 55-59.5 — the Rule of 55 lets you withdraw from your current employer's 401(k) penalty-free if you separate from service at age 55+. IRAs don't have this provision.