401(k) vs IRA: Which Should You Max Out First?

You have limited dollars to save for retirement. Should you max out your 401(k) first, or prioritize your IRA? The answer depends on your specific situation, but there's a strategic order that maximizes your benefits for most people.

The Optimal Contribution Order

For most people, this is the ideal priority:

• 1. 401(k) up to employer match (free money!)
• 2. Max out HSA if eligible (triple tax advantage)
• 3. Max out IRA (better investment options)
• 4. Max out remaining 401(k) space
• 5. Mega backdoor Roth if available
• 6. Taxable brokerage account

401(k) Advantages

• Much higher contribution limits ($23,000 in 2024 vs $7,000 for IRAs)
• Employer match (typically 3-6% of salary)
• Automatic payroll deduction (set it and forget it)
• Higher creditor protection in most states
• Can borrow from it in emergencies (not recommended, but possible)
• Some plans offer Roth 401(k) option

401(k) Disadvantages

• Limited investment options (only what your plan offers)
• Often higher fees than IRAs
• Less control over investment selection
• Required minimum distributions (RMDs) start at age 73
• May have poor fund choices
• Harder to do Roth conversions while still employed

IRA Advantages

• Unlimited investment options (stocks, bonds, ETFs, REITs, etc.)
• Lower fees (can choose low-cost providers)
• More flexibility in estate planning
• Easier to do Roth conversions
• Can contribute to both Traditional and Roth
• Better for tax optimization strategies

IRA Disadvantages

• Much lower contribution limits ($7,000 in 2024)
• Income limits for deductibility and Roth eligibility
• No employer match
• Requires active management and discipline
• May need backdoor Roth strategy if high income

Special Scenarios

Scenario 1: Excellent 401(k) Plan

If your 401(k) offers:

• Low-cost index funds (expense ratios under 0.10%)
• Good match (4%+)
• Roth 401(k) option
• After-tax contributions with in-plan conversions

Strategy: Max out the 401(k) before IRA. The higher limits and good options make it superior.

Scenario 2: Poor 401(k) Plan

If your 401(k) has:

• High fees (1%+ expense ratios)
• Limited fund options
• Only active funds, no index options
• Low or no employer match

Strategy: Get the match only, then max IRA, then consider taxable accounts before going back to 401(k).

The High-Income Earner's Dilemma

If you earn too much to deduct Traditional IRA contributions or contribute to Roth IRA directly:

• Max out 401(k) (no income limits)
• Use backdoor Roth IRA strategy
• Consider mega backdoor Roth if available
• HSA contributions (no income limits)
• Taxable brokerage for remaining savings

Traditional vs. Roth: The Tax Question

Within both 401(k)s and IRAs, you often have a Traditional vs. Roth choice:

Choose Traditional if:

• You're in a high tax bracket now (24%+)
• You expect lower income in retirement
• You want to reduce current taxable income
• You're pursuing FIRE and will do Roth conversions later

Choose Roth if:

• You're early in your career with lower income
• You expect higher income in retirement
• You want tax diversification
• You're maxing everything and want to save more after-tax dollars

The FIRE Perspective

For those pursuing Financial Independence:

• Max out Traditional 401(k) during high-earning years
• Build Roth IRA for early retirement access (contributions can be withdrawn anytime)
• Keep 3-5 years expenses in taxable accounts
• Plan Roth conversion ladder starting 5 years before FIRE
• Consider mix of Traditional and Roth for tax flexibility

Common Mistakes to Avoid

• Not getting the full employer match
• Ignoring your 401(k) because the options 'aren't perfect'
• Not considering your total tax situation
• Forgetting about the HSA (if eligible)
• Not maxing IRA just because the limit is 'too small'
• Paying off low-interest debt instead of getting match
• Not reviewing your 401(k) investment options annually

Quick Decision Framework

Ask yourself:

• Does my employer match 401(k)? → Contribute to get full match first
• Am I eligible for HSA? → Max it out second
• Are my 401(k) investment options good? → If yes, max 401(k); if no, max IRA first
• Have I maxed both? → Consider mega backdoor Roth or taxable brokerage
• What's my current vs. expected retirement tax bracket? → Informs Traditional vs. Roth choice