When most people think of a retirement account, they think of a 401(k) because it's the most common in America by a long shot. Over the years, 401(k)s have undoubtedly helped millions of Americans build a nest egg to make sure they're financially secure in retirement.
Despite how effective 401(k)s are for saving and investing for retirement, there's one unfortunate truth about them: Aiming to max them out is overrated. And although that may sound counterintuitive to building your nest egg, I'll show you why that's the case.
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Maxing out an account isn't feasible for most people
The first thing to note is that maxing out a 401(k) isn't feasible for most Americans. In 2026, the maximum amount you can contribute to your 401(k) is $24,500. If you're 50 or older, you can contribute an extra $8,000 ($32,500 total), and if you're 61, 62, or 63, you can contribute an extra $11,250 ($35,750 total).
For perspective: The median U.S. household income is around $83,730.
These amounts are much more than most Americans can reasonably contribute, and instead of making that the main goal, you're better off taking advantage of an IRA alongside your 401(k). Both IRA types (traditional and Roth) have unique advantages that make them a great option to supplement your 401(k).
IRAs come with more investment freedom
If you have a 401(k), your only investment options are those offered by your plan provider. These usually include index funds, actively managed funds, and target-date funds, which, for many people, are the only options they need or care about. However, for people who want a bit more control over how they structure their portfolio, these choices can be limiting.
Inside your IRA, you can invest in almost any stock that you could in a standard brokerage account. Want to invest in Nvidia without being an employee? No problem. Got a lot of faith in artificial intelligence's future and want to invest in an AI exchange-traded fund (ETF)? You got it.
The freedom to choose anything you want to invest in ensures your portfolio truly represents your style, risk tolerance, and goals.
IRAs have more early withdrawal flexibility
The goal should be to always keep the money in your retirement accounts until retirement, but sometimes life events warrant dipping into them. IRAs allow you to make early withdrawals for more purposes without facing the typical 10% early withdrawal fee:
- First-time homebuyers: You're able to withdraw up to $10,000 for expenses like a down payment, closing costs, or acquisition costs.
- Qualified higher education expenses: Examples include tuition, fees, books, and other required supplies.
- Health insurance premiums: You can cover your premiums while unemployed.
Being able to use IRA funds for these expenses provides greater flexibility to handle important life situations before retirement.
IRAs are best used as a supplement
IRAs have much smaller contribution limits than 401(k)s. In 2026, the maximum amount you can contribute is $7,500 (both Roth and traditional combined), or $8,600 if you're 50 or older. This makes IRAs hard to rely on as your primary retirement account, but they are a great supplement.
Assuming you can't max out both your 401(k) and IRA, a good route to take is to contribute enough to receive your employer's maximum match, aim to max out your IRA, and then up your 401(k) contributions to what you can reasonably contribute. This allows you to take advantage of a 401(k) and IRA, getting the best of both worlds.
Deciding between a traditional and Roth IRA generally comes down to when you want to pay taxes. Traditional IRAs provide upfront tax breaks (potentially lowering your taxable income), but you're responsible for paying taxes when you withdraw in retirement. You contribute after-tax money into a Roth IRA, so withdrawals are tax-free in retirement.
If you think your tax bracket will be lower in retirement, it may be smart to go with a traditional IRA, so you pay taxes at a cheaper rate down the road. If you think your tax bracket will be higher in retirement, it may be smart to use a Roth IRA, so you can get tax-free withdrawals later when your tax rate is higher.
