Updated for the 2024 tax year.
When it comes to retirement accounts, both 401(k)s and IRAs have their upsides. So how do you know which one to use and when? You could just go with what your employer puts in front of you. You could open every type of account you’re eligible for and contribute to the limit (#goals). You could break out the Magic 8-Ball. Or ... you could think for a minute about a few things that are specific to you — things like how much you’re currently paying in fees, your salary, and how much you plan to invest — and make an informed decision.
Getting back to maxing out both types of accounts, that’s $30,000 a year ($38,5000 if you’re over 50). Don’t be intimidated by that number if it’s not realistic. Instead, be grateful for it, because it means the IRS is giving you the ability to put away lots of tax-advantaged contributions over the course of your working life.
Meanwhile, here’s a flowchart to help you decide.
There are generally three paths:
1. You don’t have access to a 401(k).
Contribute as much as you can to an IRA. If you max it out (at $7,000, or $8,000 if you’re over 50), open a taxable brokerage account to contribute the full amount you need to be on track for retirement.
2. You do have access to a 401(k), and you either have access to low-fee funds in your 401(k) or make too much to deduct IRA contributions (or both).
Contribute as much as you can to your 401(k). If you’re allowed to choose the individual investments in your portfolio, look for low-cost funds with investment fees under 0.40-0.50%. If you max it out (at $23,000, or $30,500 if you’re over 50), open an IRA. If you max that out and still need/want to contribute more, open a taxable brokerage account and keep going.
3. You do have access to a 401(k), you qualify to deduct your IRA contributions, and there are no investments available in your 401(k) plan with investment fees under 0.40–0.50%.
Stop and consult a tax pro. There’s a chance you might be able to save some money by following a different path.
If they tell you to go for it, start by contributing enough to get your full employer match, if you have one (because free money). Again, pick investments with low expense ratios. Then switch gears and put money into an IRA until you max it out. Then, if you can afford to contribute more, switch your focus back to your 401(k) and finish maxing that out. Finally, if you still need/want to contribute more, open a taxable investment account and keep going.
Want to talk about your retirement with a pro? Book a complimentary call with a financial planner on Ellevest’s all-women team to get clear on your best next step when it comes to your financial goals.
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