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The Roth IRA and the 401(k) are two of the most powerful retirement accounts available. Most people should use both — but the order matters. Here is how to decide which to fund first.
Key Differences: Roth IRA vs. 401(k)
| Feature | Roth IRA | 401(k) |
|---|---|---|
| 2026 contribution limit | $7,000 ($8,000 if 50+) | $23,500 ($31,000 if 50+) |
| Tax treatment | After-tax contributions; tax-free withdrawals | Pre-tax contributions; taxed on withdrawal |
| Employer match | No | Yes (if employer offers) |
| Income limits | Yes (phases out at higher incomes) | No |
| Investment choices | You choose (stocks, ETFs, funds) | Limited to plan options |
| Required minimum distributions | None during your lifetime | Yes, starting at age 73 |
| Early withdrawal of contributions | Anytime, penalty-free | Subject to 10% penalty before 59.5 |
The Recommended Order: Where to Save First
Follow this priority order for most situations:
Step 1: Contribute to Your 401(k) Up to the Employer Match
If your employer matches contributions, this is a 50%–100% instant return on your money. It is the best guaranteed return available anywhere. Contribute at least enough to capture the full match before doing anything else.
Example: Your employer matches 50% of contributions up to 6% of your salary. You earn $60,000. Contributing $3,600 (6%) triggers a $1,800 match — that is $1,800 of free money. Never leave this on the table.
Step 2: Max Out a Roth IRA
After capturing the full 401(k) match, put money into a Roth IRA up to the annual limit ($7,000 in 2026). The Roth IRA’s advantages are powerful:
- Tax-free growth and withdrawals in retirement
- No required minimum distributions — you never have to take money out
- Contributions (not earnings) can be withdrawn at any time without penalty — it doubles as an emergency fund backup
- More investment choices than most 401(k) plans
Step 3: Go Back and Max Out the 401(k)
After maxing the Roth IRA, return to your 401(k) and contribute up to the $23,500 limit. Even if the investment options are limited, the tax-deferred growth is valuable over decades.
Step 4: Taxable Brokerage Account
After maxing both retirement accounts, invest additional savings in a taxable brokerage account. There are no contribution limits, and you can access funds without penalty at any time.
When a Traditional 401(k) Beats a Roth IRA
The Roth IRA is the better choice for most workers in their 20s and 30s who expect to be in a higher tax bracket in retirement. But the traditional 401(k) wins if:
- You are in a high tax bracket now and expect to be in a lower one in retirement
- You earn too much to contribute to a Roth IRA directly (above $165,000 single / $246,000 married)
- You need the tax deduction now to reduce your current-year tax bill
Bottom Line
The smart order is: capture the full 401(k) employer match, then max a Roth IRA, then go back and max the 401(k). This approach captures free money, maximizes tax-free growth, and builds long-term flexibility. Most people can and should use both accounts every year.
Frequently Asked Questions
Can you contribute to both a Roth IRA and a 401(k) in the same year?
Yes. You can contribute to both in the same year as long as you meet the income limits for the Roth IRA. Contributing to a 401(k) does not affect your Roth IRA eligibility.
What is the income limit for a Roth IRA in 2026?
For 2026, single filers can contribute the full amount if their income is under $150,000. The contribution phases out between $150,000 and $165,000. Married filing jointly: full contribution under $236,000, phases out up to $246,000.
What happens to my 401(k) if I leave my job?
You can leave it with your former employer, roll it into your new employer’s 401(k), roll it into a traditional IRA, or cash it out (cashing out triggers taxes and a 10% penalty if under 59.5). Rolling into an IRA gives you the most flexibility.