401(k) vs Roth IRA: which one should I use first?

The 401(k) and Roth IRA are the two most common retirement savings vehicles for American workers. For most people, the right answer is not one or the other — it is both, in the right order. Understanding how they differ helps you sequence contributions in a way that minimizes taxes over your lifetime.

How a 401(k) works

A 401(k) is an employer-sponsored plan. Contributions come directly from your paycheck before taxes, which reduces your taxable income today. The money grows tax-deferred — no taxes on dividends or capital gains while it is in the account. You pay ordinary income tax on withdrawals in retirement. The 2026 contribution limit is $24,500 ($32,500 for those 50+). Many employers match a portion of contributions — that match is effectively free compensation and is almost always worth capturing in full before contributing elsewhere.

How a Roth IRA works

A Roth IRA is an individual account you open yourself. Contributions are made with after-tax dollars — no deduction today, but qualified withdrawals in retirement are completely tax-free, including all the growth. The 2026 limit is $7,500 ($8,600 for those 50+). Income limits apply: for single filers, contributions phase out between $153,000 and $168,000 in modified AGI. Roth IRAs have no required minimum distributions during the owner's lifetime, which is a significant estate planning advantage.

The core tax question

The 401(k) gives you a tax break now. The Roth IRA gives you a tax break later. Which is worth more depends on whether your tax rate is higher today or in retirement. If you are in a low bracket now and expect to earn more later, Roth wins on math. If you are in a high bracket now and expect lower income in retirement, traditional 401(k) wins. When uncertain, holding both creates tax diversification.

The recommended contribution sequence

Most financial planners suggest this order: first, contribute enough to your 401(k) to capture the full employer match. Second, max your Roth IRA if income allows. Third, return to your 401(k) to contribute up to the annual limit. This sequence captures free money first, then prioritizes the tax-free flexibility of the Roth, then uses the 401(k) for additional pre-tax savings.

Investment options: a practical difference

401(k) investment menus are set by your employer and vary significantly in quality. A Roth IRA opened through a brokerage gives you access to the entire market. If your 401(k) has poor fund options with high expense ratios, the Roth IRA becomes more attractive as a second destination before returning to the 401(k) beyond the match.

Frequently asked questions

Can I contribute to both a 401(k) and a Roth IRA in the same year?
Yes. The limits are independent. You can contribute up to $24,500 to a 401(k) and up to $7,500 to a Roth IRA in the same year, subject to income limits on the Roth side.

What if my income is too high for a Roth IRA?
Above the income phase-out, a backdoor Roth conversion may be available: make a non-deductible traditional IRA contribution and convert it to Roth. If your traditional IRA had no prior pre-tax balance, the conversion is effectively tax-free.