Most people cannot max out both a 401(k) and an IRA every year, and that is perfectly normal. The more useful question is: given what you have available to save, where should the money go first? The answer depends on a few straightforward factors.
Step one: Always capture the full employer match first
If your employer offers a 401(k) match, contribute at least enough to receive the full match before directing money anywhere else. An employer match is an immediate 50% or 100% return on that portion of your contribution — no investment can reliably match that.
Not capturing the full match is one of the most common and avoidable retirement planning mistakes. Start here, always.
Step two: Consider an IRA next
Once you are getting the full employer match, an IRA is often the next priority — particularly a Roth IRA if you are eligible. Here is why:
- IRAs give you access to a much wider range of investments than most 401(k) plans
- A Roth IRA offers tax-free growth and tax-free withdrawals in retirement, with no required minimum distributions during your lifetime
- IRAs often have lower-cost investment options available than employer plans
The 2026 IRA contribution limit is $7,500, or $8,600 if you are 50 or older. For many people, this is an achievable amount to set aside annually once the employer match is secured.
Step three: Return to the 401(k) for additional contributions
After funding an IRA, any additional retirement savings can go back into your 401(k) up to the 2026 annual limit of $24,500 (or $32,500 if you are 50 or older, and $35,750 if you are 60 to 63). The pre-tax contribution reduces your taxable income today, which has real value if you are in a meaningful tax bracket.
When does the order change?
There are situations where the standard order shifts:
- Your 401(k) plan has poor, high-fee investment options. If the funds available in your plan carry high expense ratios, it may be worth funding an IRA to the maximum first (after capturing the match) before putting more into the 401(k).
- You earn too much for a Roth IRA. If your income exceeds the Roth IRA threshold, the IRA step in the sequence changes — you might use a non-deductible Traditional IRA with a backdoor Roth conversion, or simply move straight from the employer match to maximising the 401(k).
- You are self-employed. Without an employer plan, the options shift entirely — Solo 401(k)s and SEP-IRAs come into play with significantly higher contribution limits.
A simple framework to remember
- Contribute to 401(k) up to the full employer match
- Max out a Roth IRA (if eligible) or Traditional IRA
- Return to 401(k) and contribute as much as budget allows
- Consider taxable investment accounts for anything beyond that
This sequence will not apply perfectly to everyone, but it is a sensible starting point that works well for the majority of people with access to both account types.
Ready to go deeper?
If you want a complete picture of how 401(k)s and IRAs work together — including contribution rules, tax strategy, rollover options, and withdrawal planning — The Essential 401(k) & IRA Retirement Guide covers all of it in plain, practical language. Available now on your preferred online shop.
