Balancing Your Retirement Strategy: When to Use Both IRAs and 401(k)s

When planning for retirement, many savers face a critical question: should i have an ira and a 401k simultaneously, or should i choose one? The answer isn’t always straightforward, as both accounts offer distinct advantages and drawbacks that depend on your financial situation.

Understanding the Core Tax Benefits

Both retirement account types provide powerful tax advantages that make them attractive for long-term savers. Contributions to traditional accounts reduce your taxable income in the year you make them. If you prefer the Roth option, you’ll pay taxes upfront but enjoy tax-free withdrawals during retirement. In either case, your investments grow without being taxed on dividends or capital gains—a significant boost to your long-term wealth accumulation.

The 401(k)'s Major Strengths You Shouldn’t Ignore

If you have access to an employer-sponsored 401(k), two features make it particularly powerful for building retirement wealth quickly.

Employer Matching—Free Money for Your Future

The employer match is essentially additional compensation for participating in your company’s plan. When you contribute a portion of your salary, your employer often contributes a matching amount—typically ranging from 50% to 100% of your contributions up to a certain percentage of your salary. For many workers, this translates to thousands of dollars annually in employer-funded growth. These matching contributions usually vest immediately, giving you full control over the funds right away.

Higher Contribution Capacity

A 401(k) allows you to save significantly more than an IRA. For 2025, the annual contribution limit stands at $23,500—more than three times the $7,000 limit for an IRA. When combined with employer matching, a 401(k) becomes an indispensable tool for aggressive savers who want to accumulate substantial retirement assets quickly.

Critical Limitations of 401(k) Plans

Despite their appeal, 401(k)s come with notable constraints worth considering seriously.

Fee Structures Can Erode Returns

Most 401(k) participants pay approximately 0.4% in annual fees when accounting for administrative charges, service fees, and fund expense ratios. While this percentage seems modest, the compounding effect over decades can significantly diminish your retirement nest egg. Smaller employers often impose higher fees, making the drag on performance even steeper.

Limited Investment Choices

Standard 401(k) plans restrict you to a predetermined menu of mutual funds or exchange-traded funds (ETFs). You cannot freely select individual stocks, bonds, or alternative investments unless your plan offers a self-directed brokerage account—which typically requires additional fees. This constraint frustrates many investors seeking broader diversification or specific portfolio strategies.

Why an IRA Offers Flexibility and Low Costs

An IRA presents an attractive alternative or complement to your 401(k). Opening an IRA involves minimal to no fees, and you maintain complete freedom to invest in virtually any security your chosen brokerage offers. You can shift your IRA to a different provider at any time, giving you control over your account management without being locked into a single provider like you are with an employer 401(k).

The Optimal Strategy: Having Both Accounts

The best approach for most savers isn’t choosing between the two—it’s strategically using both. Consider this framework:

Start by contributing enough to your 401(k) to capture your full employer match. This is essentially free money and provides an immediate return on investment that’s hard to beat. Once you’ve secured the full match, redirect additional savings to an IRA. This allows you to maintain low-cost investing with broad choices while still capturing employer benefits.

If you exhaust your IRA’s $7,000 annual limit and still have money to save, return to your 401(k) and increase contributions up to the $23,500 cap. Should you have surplus funds beyond that, a taxable brokerage account often provides better long-term outcomes than forcing more money into a limited 401(k) plan.

Making Your Personal Decision

There’s no universal formula—your optimal retirement savings strategy depends on your employer’s specific plan quality, fee structure, your income level, and your investment preferences. Evaluate your 401(k)'s costs and fund options honestly. If fees are reasonable and choices are decent, a 401(k) paired with an IRA creates a powerful dual-account strategy. If your 401(k) disappoints on both fronts, an IRA becomes your primary vehicle, though capturing any employer match still makes sense.

The key is intentional planning rather than defaulting to a single account type.