Should I Save for Retirement in a 401(k), an IRA, or Both?
With pension plans becoming increasingly rare, the responsibility of saving for a 20- to 30-year retirement now rests largely on your shoulders. This new reality can put a lot of pressure on how and where you save. Should you save in your employer’s plan, open an individual retirement account, or use both?
In this week’s Money Wisdom Question Series, Heath Grossman, CFP® explains the key differences between a 401(k)-type plan and an IRA.
Who Can Participate?
Anyone who works for an employer with a retirement savings plan, like a 401(k), 403(b), or 457, can contribute. To contribute to a traditional IRA, you just need to have earned income. However, your ability to contribute directly to a Roth IRA depends on your modified adjusted gross income (MAGI).
How Much Can You Contribute?
If you’re under 50 years old, you can contribute up to $24,500 to your 401(k) plan in 2026. Once you turn 50, you can take advantage of an additional $8,000 catch-up contribution. A special catch-up contribution also exists for the years in which you are 60, 61, 62, or 63, which is up to $11,250. Often, employers will offer a matching or profit-sharing type of contribution as well.
Generally, employer-sponsored plans allow you to contribute more money than IRAs. Whether traditional, Roth, or both, your total IRA contributions cannot exceed $7,500 in 2026. Once you turn 50, there is an additional $1,100 catch-up contribution available.
What Are Your Investment Options?
While 401(k)s often offer different mutual funds, your investment options are quite limited. On the other hand, IRAs allow you to invest in almost anything from an investment standpoint. You can usually choose from a wide range of individual stocks, traditional mutual funds, and exchange-traded funds (ETFs).
Should You Contribute to Both?
Before you decide to contribute to both types of retirement savings accounts, consider how much you’re aiming to save. Maximizing your contributions in multiple places can surely help you build your retirement savings faster. It may also offer tax advantages by using a different mix of traditional and Roth funds.
You can even roll your 401(k) over to an IRA for more investment flexibility and control. IRA rollovers are generally an option if you leave that employer or if you’re still with the employer but have reached age 59½.
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The Ultimate 401(k) Guide
Learn the 5 decisions you need to make regarding your 401(k) in this book by Eric Hogarth, CFP®. He’ll help guide you through the many options you have with your 401(k) and to provide the clarity you need to help you make the important decisions that will provide the foundation for you and your family’s financial future.
