Tax Tip: Fund Your 401(k) to the Match First, Then the IRA
Newcomers to the US often ask which retirement account to use first. The math has a clear order: an employer 401(k) match is an instant 50–100% return that no investment can beat. For 2026, you can put $24,500 into a 401(k) and $7,500 into an IRA (under 50) — but the sequence matters more than the limits.
How to do it
- Contribute to your 401(k) up to the full employer match. A typical "50% match up to 6% of salary" means contributing 6% doubles that portion instantly. Skipping it is leaving salary on the table.
- Then max the IRA ($7,500 for 2026). IRAs give you the entire fund universe instead of your employer's short menu — usually lower fees and better choices. The IRA deadline is April 15, 2027 for the 2026 tax year.
- Then go back to the 401(k) up to the $24,500 employee limit if you still have savings capacity.
- Pick Roth vs. traditional deliberately. Traditional = deduction now, tax later (good if you're in a high bracket today). Roth = no deduction now, tax-free later (good early in your career or in low-income years).
Watch out
- IRA deductibility has income phase-outs. If you (or your spouse) are covered by a workplace plan, traditional IRA deductions phase out above certain incomes — but Roth IRA eligibility has its own (higher) phase-outs. Check the current-year IRS figures before assuming.
- The limits are per person, not per account. The $7,500 IRA cap covers all your traditional and Roth IRAs combined; the $24,500 covers all your 401(k)/403(b) plans combined.
- 10% early-withdrawal penalty. Pulling from either account before age 59½ generally costs an extra 10% on top of income tax, with limited exceptions.
- Catch-ups at 50+. In 2026 you can add $8,000 more to a 401(k) ($32,500 total) and $1,100 more to an IRA ($8,600 total) from the year you turn 50. Ages 60–63 get a "super" 401(k) catch-up of $11,250.
Frequently asked questions
No employer plan at all — what then?
The IRA becomes your main vehicle ($7,500), and traditional IRA contributions are fully deductible at any income when no workplace plan covers you. Also ask about SEP or SIMPLE options if you're self-employed.
Roth or traditional 401(k)?
Rough rule: early career or temporarily low income → Roth. Peak earning years → traditional. Many people split — the $24,500 limit applies to pre-tax and Roth contributions combined.
Can I contribute to a 401(k) and an IRA in the same year?
Yes. They're independent limits. Maxing both in 2026 means $32,000 of tax-advantaged savings (under 50).
Sources
- IRS – 401(k) limit increases to $24,500 for 2026, IRA limit to $7,500: https://www.irs.gov/newsroom/401k-limit-increases-to-24500-for-2026-ira-limit-increases-to-7500
- IRS – COLA table for retirement plan limits: https://www.irs.gov/retirement-plans/cola-increases-for-dollar-limitations-on-benefits-and-contributions
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