Both traditional IRAs and 401(k)s offer valuable tax advantages for retirement savings, but they serve different purposes in your strategy. Understanding their key differences helps you choose the right approach and maximize your savings potential. Here are some key takeaways to consider:

• Both accounts grow your retirement savings tax deferred: Traditional IRAs and 401(k)s offer tax advantages and can work together to maximize long-term growth.
• Pre-tax vs. after-tax matters: Contributions to pre-tax retirement accounts lower taxable income now, while after-tax (Roth) contributions grow tax-free for future withdrawals.
• Employer match is free money: Contributing enough to capture your 401(k) match is one of the easiest ways to boost savings.
• Contribution limits differ: 401(k)s allow higher annual contributions than IRAs, and catch-up contributions are available for those 50+.
• Investment flexibility varies: IRAs generally provide more investment options and lower fees, while 401(k)s offer curated, easier-to-manage selections.
• Plan strategically for taxes and withdrawals: Having a combination of taxable, pre-tax, and post-tax accounts, considering income limits, and planning for RMDs helps optimize tax benefits and maintain flexibility in retirement.

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Traditional IRA vs. 401(k): How to pick for your retirement strategy

A traditional IRA (Individual Retirement Arrangement) and a 401(k) are both powerful retirement savings accounts that can help you grow your savings for the future—but they work a little differently. A traditional IRA lets you contribute pre-tax dollars and has income limitations for deducting contributions from taxes. Work with your tax professional to help determine your eligibility. A 401(k), typically offered through your employer, may come with matching contributions, essentially free money for your future.

But the right choice depends on your goals and circumstances. Contribution limits, tax treatment, and withdrawal rules vary between accounts. A 401(k) often works well for those aiming to save more each year, while a traditional IRA can offer you more flexibility in choosing investments.

Think about your income, retirement timeline, and employment status. With the right strategy, you can build a retirement plan that not only grows your savings but also helps keep your taxes in check along the way.

How do retirement contributions affect my taxable income?

When you save for retirement, understanding how your contributions impact your taxable income can put more money back in your pocket today. Traditional IRAs and 401(k)s offer tax advantages that reduce what you owe now while helping your savings grow for the future. Think of it as a “discount” on your retirement contributions: every dollar you contribute can lower your tax bill and make it easier to save without feeling the pinch.

Pre-tax contributions

Pre-tax contributions are the backbone of traditional IRAs and 401(k)s. Your contributions are made before income taxes are applied, which may reduce your taxable income depending on your earnings. However, it's important to note that IRA contribution deductions aren't automatic—you'll claim this deduction when you file your taxes, and eligibility depends on your total household income level. For example, if you earn $60,000 and contribute $6,000 to a traditional IRA or pre-tax 401(k), you’re only taxed on $54,000.

The tax savings can be significant. In the 22% bracket, that $6,000 contribution reduces your tax bill by $1,320 right away. Plus, the funds grow tax-deferred, meaning you won’t pay taxes on earnings until retirement, giving your investments more time to compound without the annual tax drag. Employer-sponsored plans work the same way and allow higher contribution limits, giving you even more potential savings.

Roth 401(k) Contributions

After-tax contributions work a little differently: you’re putting in after-tax dollars, meaning the money has already been taxed before it goes into your account. While this doesn’t lower your taxable income today, it can still be a smart move. Many 401(k) plans allow after-tax contributions above standard limits, which can then be converted to Roth accounts for tax-free growth.

This strategy shines if you expect to be in a higher tax bracket in retirement. You pay taxes now at your current rate, but future growth and qualified withdrawals are tax-free. Knowing when to use pre-tax versus after-tax contributions can help you tailor your retirement strategy to your income, goals, and long-term tax planning.

Who can open each account

Retirement account eligibility can seem complicated, but it’s simpler than it looks, and most working Americans can access at least one of these options.

Traditional IRA eligibility:

• Anyone with earned income can contribute
• No employer required
• Spousal IRAs available for non-working spouses

401(k) eligibility:

• Must be offered by your employer
• May require waiting period (varies by company)
• Access to employer matching contributions

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What are the 2025 contribution limits for retirement accounts?

Knowing contribution limits is key to making the most of your retirement savings and staying on the IRS’s good side. These limits adjust each year with inflation, so keeping up-to-date ensures you’re maximizing tax-advantaged opportunities.

According to IRS Guidelines for 2025:

• Traditional IRA: Up to $7,000
• 401(k): Up to $23,500

The higher 401(k) limit is a game-changer for aggressive savers looking to fast-track retirement savings while lowering taxable income.

If you’re 50 or older, the IRS gives you extra room with catch-up contributions:

• Add $1,000 more to your IRA (total $8,000)
• Add $7,500 more to your 401(k) (total $31,000)

These catch-up contributions recognize that many people need to accelerate their savings as retirement nears, and they let you take full advantage of your earning power while it lasts.

IRA vs. 401(k): Which offers better investment options?

The investment choices in your retirement account can shape your strategy and your long-term results. Having the right mix will help you balance risk, grow your savings, and stay on track toward your goals.

Traditional IRAs:

• Broad investment universe: individual stocks, bonds, ETFs, REITs
• Lower expense ratios (often 0.00-0.20%)
• Self-directed options available
• More provider choices

401(k) plans:

• Curated selection (typically 10-30 mutual funds)
• Target-date funds that auto-adjust
• Institutional pricing on some funds
• Professional oversight and fiduciary protection

How much should I contribute to get my full employer match?

Your employer match is essentially free money and one of the easiest ways to boost your retirement savings. Yet so many workers leave it on the table.

Here’s the deal: your employer contributes to your 401(k) based on your own contributions. A common setup is a 50% match on contributions up to 6% of your salary. 

For example, if you earn $50,000 and contribute 6% ($3,000), your employer adds $1,500. That’s an instant 50% return before any market growth. Some employers match dollar-for-dollar or even contribute regardless of your input.

Keep in mind, employer contributions typically vest over time, so staying with the company a few years may be required to keep the full amount. 

Unlike 401(k)s, traditional IRAs don’t include matching contributions, since they’re individual accounts. 

Rules for withdrawals and penalties

Taking money out of your retirement accounts before 59½ usually comes with a 10% penalty on top of regular income taxes. For example, a $10,000 early withdrawal could cost $3,500 or more if you’re in the 25% tax bracket. Some 401(k)s let you borrow against your balance, but leaving your job can trigger immediate repayment.

The IRS does offer exceptions. Traditional IRAs allow penalty-free withdrawals for first-time home purchases, higher education, disability, or certain medical expenses. 401(k)s have the “Rule of 55,” letting you access funds penalty-free if you leave your employer at 55 or older.

Structured strategies can also help. Substantially equal periodic payments (SEPP) let you take fixed withdrawals before 59½, and Roth IRA conversions allow you to pay taxes now and access the funds penalty-free after five years. 

With the right guidance, you can tap your retirement savings when needed while minimizing taxes and penalties. Domain Money’s CFP® advisors can help make this process simple and tailored to your goals.

Required Minimum Distributions (RMDs)

Eventually, the IRS will want its share. This is where required minimum distributions (RMDs) come in. RMDs are mandatory withdrawals from traditional IRAs and 401(k)s that ensure taxes aren’t deferred indefinitely.

You must start taking RMDs at age 73. The amount is based on your account balance and life expectancy, as outlined in IRS tables. For example, if you have $500,000 in your account at 73, your first RMD would be roughly $18,868.

Missing an RMD comes with steep penalties: 25% of the amount you should have withdrawn. On the $18,868 example, that’s $4,717 in penalties alone. There is some flexibility for those still working. RMDs from a current employer’s 401(k) can often be delayed until retirement.

Planning ahead can help you avoid unnecessary penalties and keep your retirement strategy on track. Knowing your RMD schedule also allows you to manage those withdrawals in a tax-smart way while keeping your long-term savings in check. 

RMD planning checklist:

• Understand your first RMD deadline (April 1 following the year you turn 73)
• Consider tax-efficient withdrawal strategies
• Plan for potential Roth conversions before RMDs begin
• Review beneficiary designations annually

Should I contribute to both a 401(k) and an IRA?

Why settle for one when you can have both? Using both a 401(k) and an IRA can supercharge your retirement savings, giving you maximum tax benefits and more flexibility in how you invest.

Start with your 401(k) if your employer offers one, especially if they provide a match, and contribute at least enough to capture the full match. 

Once you’ve secured that, consider opening a traditional or Roth IRA. This adds investment options, often with lower fees, giving you more control over your portfolio.

This strategy also offers tax diversification. You might contribute to a 401(k) for immediate tax savings while funding a Roth IRA for tax-free withdrawals in retirement. In 2024, maxing out both a 401(k) and an IRA could have allowed you to save $29,500 in tax-advantaged accounts, or $37,000 if you’re 50 or older and eligible for catch-up contributions.

Retirement account checklist: Finding the right fit

Choosing the right retirement account isn’t about finding the “best” option; it’s about what fits your income, goals, and work situation. Use this checklist to help you make more informed decisions.

1. Assess your current tax situation

• Are you in a high tax bracket now? Consider a 401(k) for the immediate deduction.
• Expect a lower bracket in retirement? Tax-deferred contributions may make even more sense.

2. Evaluate your savings capacity

• Can you take advantage of a 401(k)’s higher contribution limits?
• Would an IRA’s lower limits still meet your retirement goals?

3. Consider your employment status

• Freelancers or self-employed? Look at IRAs or a solo 401(k).
• Frequently change jobs? Check how your 401(k) accounts move with you and whether consolidation is smart.

4. Think about investment flexibility and fees

• IRAs often offer more investment choices and lower fees.
• 401(k)s may have limited options but often include employer matching.

5. Plan for tax diversification

• Balance traditional (pre-tax) accounts with Roth (after-tax) options to manage taxes both now and in retirement.

6. Maximize available benefits

• If your employer offers a 401(k) match, contribute enough to capture it fully before funding other accounts.

Taking control of your retirement strategy

The traditional IRA vs. 401(k) debate doesn't have a clear-cut answer. Instead, knowing the difference between them helps put you in control of your own retirement strategy. Both accounts offer valuable tax advantages and can work together to help you build a robust savings plan.

Here’s the smart approach: prioritize any employer match in your 401(k) first, because it’s essentially free money. Then, consider how an IRA can complement your workplace plan. Keep contribution limits, income thresholds, and tax implications in mind, and remember your strategy isn’t set in stone. You can always adjust as your income, career, and life circumstances evolve.

The most important step is simply to start. Whether you begin with your employer’s 401(k) or open an IRA on your own, taking action now sets you up for long-term success.

Professional guidance can make a big difference here. One of Domain Money’s CFP® advisors can help you navigate these accounts, maximize your tax benefits, and craft a strategy tailored to your goals.

Frequently asked questions (FAQs):

Is it better to have a 401k or an IRA?

Neither is strictly “better,” it depends on your situation. A 401(k) lets you contribute more each year and often includes an employer match, while an IRA gives you a wider range of investment options and more control over your account. Many people use both to maximize savings and tax benefits.

What are the disadvantages of a traditional IRA?

Traditional IRAs offer tax-deferred growth, but you’ll pay taxes when you withdraw in retirement. Plus, the IRS requires you to take required minimum distributions (RMDs) once you reach a certain age, so the money can’t stay in the account forever.

Can I lose my IRA if the market crashes?

Your IRA isn’t immune to market fluctuations; the risk comes from the investments you choose inside it. Diversifying your portfolio across stocks, bonds, and other assets can help reduce exposure to market swings.

Can I contribute the full $7,000 to an IRA if I have a 401k?

Yes. You can contribute to a traditional or Roth IRA even if you participate in a 401(k), as long as you meet the IRA’s eligibility rules. This lets you take advantage of both accounts’ benefits and build a more flexible retirement strategy.

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_{Source: Internal Revenue Service}