Should You Max Out Your 401(k) or IRA First?

When it comes to retirement savings, deciding whether to max out your 401(k) or IRA first can feel like a good problem to have—but it’s one that requires careful planning. In 2025, the annual contribution limit for a 401(k) is $23,500 and the limit for individual retirement accounts (IRAs) is $7,000.

The right strategy depends on several variables, including your current tax bracket, savings goals, stage of your career and whether you expect higher or lower income in retirement.

Here’s how to weigh your options and make the most of your tax-advantaged savings.

How to Divide Your Retirement Savings

Deciding where to put your retirement savings can be overwhelming. When choosing how to balance these contributions, the first step is understanding the distinct tax differences for 401(k)s, traditional IRAs, and Roth IRAs. This is because it can make a meaningful difference in the value of your withdrawals in retirement years. 

Given the rising cost of living, contributing solely to a 401(k) may not be enough for building your retirement savings nest. That’s why having more than one account, such as a traditional or Roth IRA, can be a useful tool for growing your retirement savings and hedging against future tax rates.

A useful rule of thumb for those with a tax bracket higher than 12% is to add 20 to your age, contribute this percentage into a 401(k), and put the remaining into a Roth IRA. For instance, if you’re 30 years old, you would put 50% of your savings into a 401(k) and 50% into a Roth IRA.

When to Max Out a 401(k) First

A 401(k) is based on the simple idea of getting a tax break on retirement contributions, which are typically taken out of your paycheck over each pay period. In addition, many employers will match these contributions up to a dollar-for-dollar cap of 3% of the employee’s salary, then a 50% match for the next 2%.

“At the bare minimum, all decisions between IRA and 401(k) contributions should come after the client has ensured that they are capturing the full company match,” says David Rath, a wealth advisor at Continuum Wealth Partners.

Maxing out your contributions to these accounts is a powerful way to generate free money for your retirement savings since it can effectively double your contributions. On average, employers matched 4.6% of contributions according to a survey from Vanguard.

Additionally, you may choose to max out your 401(k) first if you are in your peak earning years and expect your retirement income to be lower in retirement.

“If you are above certain income levels, your ability to contribute on a pre-tax basis (and thus lower your current tax bill) will be limited to 401(k) contributions,” says Rath. This may help lower your current income tax rate today, thanks to the tax break on contributions from 401(k)s. 

When to Max Out an IRA First

For those with lower tax rates who expect their income to rise in the future, it may be worth contributing to a Roth IRA first. If you’re early in your career, this can serve as a valuable planning strategy to help offset taxes in the future.

For instance, you may pay a 24% tax rate on contributions to a Roth IRA today—but could protect yourself from a 20% tax hit in retirement. Let’s say a worker put $5,000 a year into a Roth IRA for 40 years that returns 5% annually. Over this time period, the savings grow to over $600,000, with the entire balance available in retirement. But if these savings are put in a 401(k), these savings face taxes upon retirement. So if a person’s tax rate in retirement is 20%, $120,000 of the savings will go to the IRS. 

In this way, you can take advantage of tax-deferred growth over time with a Roth IRA while also making the most out of the tax deductions on contributions to 401(k)s when your income tax rises over the decades.

Finally, another benefit of IRAs is their flexibility. “If your employer-sponsored plan has a limited investment menu and you are looking for more options, it would make sense to focus on IRA contributions,” says Rath. “Also, be sure to look at the underlying fees on the investments in the 401(k) plan.”

The Bottom Line

Deciding which type of retirement account to max out first depends on many factors, including your income and expected future tax rates. At its core, these financial decisions hinge on whether you choose to pay taxes today or in the future. One strategy to consider is putting your 401(k) tax refund into a Roth IRA to help build your spending power even further in retirement years.