401k vs IRA: Which One Should You Fund First

If your employer matches 401k contributions and you're not contributing at least enough to get the full match, you're leaving part of your salary on the table. Not figuratively. The match is compensation your employer is offering you that you're declining to take.

That's where the question of 401k vs IRA should almost always start — not with a comparison of tax structures or investment options, but with whether there's free money available that you're currently walking past.

The Employer Match: Always First

A typical employer match looks something like this: the company will match 50% of your contributions up to 6% of your salary. So if you earn $60,000 and contribute 6% ($3,600), your employer adds $1,800 to your account. That's an instant 50% return on $3,600. Nothing you can put in an IRA, stock account, or high-yield savings will give you that.

The threshold is the match percentage. If your employer matches up to 4% of salary, contribute at least 4%. If they match up to 6%, contribute 6%. Below that threshold, the return on every additional dollar you contribute to the 401k is dramatically higher than anything else you can do with it.

Above the match threshold, the calculus changes. That's where the IRA conversation becomes relevant.

What Makes an IRA Different

An IRA — Individual Retirement Account — is an account you open yourself, separate from your employer. You pick the brokerage, you pick the investments, and you're not limited to whatever menu your company's 401k plan offers. For people whose 401k plan has mediocre investment options with high fees, an IRA often has better choices at lower cost.

The contribution limit for an IRA in 2025 is $7,000 per year (or $8,000 if you're 50 or older). That's lower than the $23,500 limit for 401k contributions. So if you're trying to save more than $7,000 per year for retirement beyond what goes into your 401k, you'll eventually loop back to the 401k anyway.

Traditional vs Roth: The Tax Timing Question

Both 401ks and IRAs come in two tax flavors: traditional and Roth. The difference is when you pay taxes.

Traditional: you contribute pre-tax dollars (reducing your taxable income now), the money grows tax-deferred, and you pay income tax when you withdraw in retirement. Roth: you contribute after-tax dollars (no deduction now), the money grows tax-free, and withdrawals in retirement are completely tax-free.

The question of which is better comes down to whether your tax rate now is higher or lower than your tax rate will be in retirement. If you're early in your career and in a lower tax bracket than you expect to be later, Roth usually wins. If you're in your peak earning years and a high tax bracket now, traditional often wins because the deduction is worth more.

Most people in their 20s and early 30s benefit from Roth because their income — and therefore their tax rate — is usually lower than it will be at retirement age. Most people in their 40s and 50s at peak income lean toward traditional for the same reason reversed.

The Roth IRA Income Limit

One thing that trips people up: you can't contribute to a Roth IRA above a certain income. In 2025 the phase-out begins at $150,000 for single filers and $236,000 for married filing jointly. Above those limits, direct Roth IRA contributions aren't allowed.

If your income is in that range or above it, there's a workaround called the backdoor Roth — contributing to a traditional IRA and then converting it to Roth shortly after. It works, but it adds complexity that most people at lower incomes don't need to think about yet.

The Order of Operations Most People Should Follow

For most people trying to figure out where retirement dollars should go, the order looks like this:

First, contribute to the 401k up to the full employer match. Whatever percentage your company matches, hit that number. The return is unbeatable.

Second, max out a Roth IRA if you're eligible — that's $7,000 in 2025. If your 401k plan has poor investment options with high fees, the IRA often gives you access to better index funds. You're also diversifying your tax exposure, which matters if tax law changes before you retire.

Third, if you've maxed the IRA and still have more to invest, go back to the 401k and contribute more — up to the $23,500 annual limit.

Fourth, if you've hit both limits and still have money left, a taxable brokerage account is the next place to invest.

This order gets shuffled depending on your specific situation — high-interest debt changes the calculus, an HSA can be inserted near the top if you're eligible, and some people have access to a 403b or SIMPLE IRA instead of a 401k. But the match-first principle holds almost universally.

What If There's No Employer Match?

If your 401k has no employer match — which is common at smaller companies and some nonprofits — the comparison shifts to investment options and fees. Look at what funds your 401k offers. If there are low-cost index funds with expense ratios under 0.20%, the 401k is still a solid choice because of the pre-tax contribution and the higher limit.

If your 401k only offers expensive actively managed funds and the lowest expense ratio available is 0.80% or higher, starting with a Roth IRA at Fidelity or Vanguard makes sense. You'll have access to index funds charging 0.03% to 0.10% — dramatically cheaper. After maxing the IRA, you can come back to the 401k for the higher limit and pre-tax benefit.

Vesting Schedules and When They Matter

One thing people forget to check: employer match contributions often don't become yours immediately. Many companies have vesting schedules — you might have to stay for two to four years before the matched funds are fully yours. If you leave before vesting, you forfeit the unvested portion.

This doesn't mean you shouldn't contribute. It means you should know where you stand. If you're planning to leave your job within the year and your vesting is on a four-year schedule, the match you're collecting may not be fully yours when you go.

The Mistake That Costs the Most

People spend months trying to optimize which account to prioritize. They read articles, watch videos, ask on forums. Then they contribute nothing because they couldn't decide. Meanwhile, the person at the same company who just signed up for 5% 401k contributions on day one of employment and never changed anything has been getting the full match for years.

The optimization matters at the margins. Starting matters more. If your situation is genuinely complex — high income, self-employed, multiple accounts, unusual 401k plan — a session with a fee-only financial planner is worth the money. For everyone else, get the match, open a Roth IRA, and start.

The best account is the one you actually fund.