IRA vs. 401(k): Where Should You Invest First?

So you've decided to save up for retirement -- congratulations!

Putting your money in an individual retirement account (IRA) or 401(k) is one of the most important financial steps you can take. Both come with valuable tax advantages, but the question of which is right for you comes down to things like income, employer benefits, and your own investing preferences.

Here's what you need to know about IRAs and 401(k)s.

IRAs and 401(k)s: Similarities

Tax benefits

Both IRAs and 401(k)s come with tax advantages that can help your money grow. And both come in two main varieties:

• Traditional: Contribute with pre-tax dollars, then pay taxes when you withdraw.
• Roth: Contribute with after-tax dollars, then enjoy tax-free withdrawals in retirement.

No matter what you pick -- traditional IRA, Roth IRA, traditional 401(k), or Roth 401(k) -- you've got some valuable tax benefits working in your favor. Investments held in any of these accounts are exempt from capital gains and dividends taxes, which can mean long-term savings in the five or six figures.

When it comes to long-term investing, these are some of your best bets.

Want to start saving for your future? See our list of the best IRAs available today to explore your options.

Withdrawal rules

Generally, you can withdraw from IRAs and 401(k)s without a penalty once you reach age 59 1/2. Before that, early withdrawals may be subject to income tax and a 10% penalty.

There are exceptions, though, like certain medical expenses, birth or adoption costs, or permanent disability. Contributions to Roth IRAs (but not earnings) can also be withdrawn early without penalty.

IRAs and 401(k)s: Differences

Here's how the differences between 401(k)s and IRAs shake out:

Availability

A 401(k) is available only through employer-sponsored plans, while an IRA is available to anyone with earned income.

Contribution limits

For 2025, the 401(k) limit is $23,500 if you're under age 50; $31,000 if ages 50-59 or 64 and older; and $34,750 if ages 60-63.

IRA limits are much lower -- $7,000 for those under 50 and $8,000 for those 50 or older -- and the limits apply across all your IRA accounts combined.

Income limits

For a Roth IRA, as your modified adjusted gross income (MAGI) rises, your contribution limit gradually phases out and can be reduced to zero. For traditional IRAs, the ability to deduct contributions is limited for higher-income earners who participate in a workplace retirement plan.

401(k)s have no income limits, making them especially appealing for high earners.

Investment options

401(k)s are generally limited to investment options selected by your employer.

IRAs, meanwhile, offer a wide range of choices, including stocks, ETFs, mutual funds, and more. If you're looking to invest in individual stocks or more specialized funds, you might need an IRA to do so. They're also perfect for diversifying into assets like bonds.

Employer contributions

Many employers offer a 401(k) match, up to a certain percentage of your income. IRAs don't include any employer contributions.

If your employer does offer a 401(k) match, make sure you contribute enough to get all of it, as it's essentially free money.

IRAs and 401(k)s: Which should you choose?

The answer here largely depends on whether your employer offers a 401(k) match. Here's what I recommend:

• If your employer offers a match: Start with your 401(k) and contribute enough to get the entire employer match. It's basically free money. After that, consider maxing out an IRA for more investment flexibility and potential tax benefits. Then, if you max out your IRA and still have more to invest, you can go back to your 401(k).
• If your employer doesn't offer a match: Consider prioritizing an IRA, since it gives you a wider range of investment choices. Once you've hit the IRA limit, you can contribute more to your 401(k).

If you can use both, that's ideal. Investing through both a 401(k) and IRA helps you diversify and ensure you'll be comfortable in retirement.

Ready to get started? Check out our list of the best Roth IRAs available today to learn more.