Whether to prioritize 401(k) or IRA contributions depends on several key factors unique to your financial situation. While there’s no one-size-fits-all answer, following a strategic framework can help you optimize your retirement savings.
Here’s the optimal contribution order for most investors:
- 401(k) up to employer match: Contribute enough to your 401(k) to capture the full employer match first, as this represents an immediate 50-100% return on your investment that you can’t get elsewhere
- Roth IRA (if eligible): After securing your match, max out a Roth IRA if your income allows (2025 contribution limit: $7,000, or $8,000 if 50+)
- Back to 401(k): After maxing your IRA, return to your 401(k) and contribute up to the annual limit (2025 contribution limit: $23,500, or $31,000 if 50+)
- HSA (if available): Health Savings Accounts offer triple tax advantages and can serve as additional retirement savings
Factors that might change this order:
- Investment options: If your 401(k) offers exceptional investment options with very low fees (below 0.1%), prioritizing it over an IRA might make sense
- Income limits: If your income exceeds Roth IRA eligibility limits ($161,000 single/$240,000 married for 2025), consider either a traditional IRA or backdoor Roth conversion
- Tax situation: If you’re in a high tax bracket now but expect lower income in retirement, traditional pre-tax accounts might be preferable to Roth accounts
- Debt obligations: High-interest debt (above 6-8%) should typically be prioritized over retirement contributions beyond the employer match
401(k) advantages to consider:
- Higher contribution limits ($23,500 vs $7,000 for IRAs in 2025)
- Employer matching contributions (typically 3-6% of salary)
- Automatic payroll deductions that enforce saving discipline
- Potential access to institutional class funds with lower expense ratios
- Better creditor protection in most states
IRA advantages to consider:
- Virtually unlimited investment options (versus the limited menu in most 401(k) plans)
- Often lower fees and expenses compared to employer plans
- Greater control over your investments
- More flexible withdrawal options before retirement age
- Ability to choose Roth treatment regardless of employer plan options
For most investors, the optimal approach is using both account types strategically rather than viewing it as an either/or decision. This provides tax diversification, investment flexibility, and maximizes total retirement contributions.