Places like NerdWallet and the FI/RE community on Reddit suggest contributing to a 401k up to the company match (if one is offered), then maxing out a Roth IRA, and then going back and continuing to fill the 401k. Why is that?

Let's say someone who's 30 makes $100k a year and contributes 6% of their paycheck a year to either a 401k or Roth IRA. That would put them in the 24% tax bracket, so we can assume that $6,000 (6%) would be taxed in the Roth IRA at 24%. If we also assume an annual return of 8% and a retirement age of 65, I get:

401k: $1,122,613

Roth IRA: $853,186

If you were to withdraw from the 401k at a rate that fell into the 24% tax bracket, then the accounts effectively have the same amount of money in them. If that's the case, then why take the approach listed above. Why not just fill up the 401k and then move on to maxing out the Roth IRA?

  • I like to refer people to this thread on investment order: forum.mrmoneymustache.com/investor-alley/investment-order/… The 2nd post offers a great ordering for the US and explanation for the order. Of particular note, HSA > IRA, and they prioritize debt repayment based on interest rate.
    – Hart CO
    Apr 28, 2019 at 14:55
  • There is a 4th step. Back door Roth IRA. Aug 12, 2022 at 1:17

2 Answers 2


You assumed the same rate of growth in both accounts, which is likely wrong.

A 401(k) doesn't give you many choices.

If yours has low-cost index funds in all the major market areas (large-cap growth, large-cap value, mid-cap growth, mid-cap value, small-cap growth, small-cap value, government bonds, corporate bonds) then it can be a good option. But beware, your money is stuck there for the duration of your employment, and your company has no obligation to offer you the same funds at the same expense ratio next year as you have now.

On the other hand, an IRA is yours to invest how you like, with any brokerage you like. So an IRA has all of the above choices available at expense ratios of 0.08% or less. As well as the possibility to invest in individual companies, or in market sector ETFs, or use leverage, or trade options.

The difference in expense ratio between 0.80% and 0.08% may seem unimportant compared to the differences in tax brackets... but you'll pay the taxes once, and you'll pay the fund expenses every year for nearly 30 years.

In addition, it is advisable to save part of your retirement in Traditional (pre-tax) accounts, and part in Roth accounts. For this part of the discussion, a Roth 401(k) can serve just as well as a Roth IRA. This is both to hedge your tax exposure (What if the government increases every tax bracket by 10%? What if they decide to break the promise that Roth earnings will never be taxed?), and also give you flexibility. Each year in retirement, you'll need to take the required minimum distribution from your pre-tax retirement savings, but the rest of your income you can choose to take from either pre-tax or Roth, so you can optimize tax burden over a number of years. In particular, you can avoid paying in a high tax bracket simply because you had to withdraw a large amount in a single year to handle an emergency. Or taxes might be extraordinarily low for a short time, because a particular Congress added a new deduction that applies to you, and you don't expect it to survive the next election, you could choose to pay taxes in the favorable year by doing a (probably partial) conversion to Roth.

Combining these two effects, the rule of thumb to max out the Roth IRA contribution each year after meeting the 401(k) match is probably the best approach for 90% of W2 employees. (The investment options are different for self-employed and contractors, as well as owners.)

If you were to withdraw from the 401k at a rate that fell into the 24% tax bracket, then the accounts effectively have the same amount of money in them.

That's false, because tax brackets apply sequentially.

Notably, tax deductions for making traditional 401(k) contributions (and deductible traditional IRA contributions where applicable, but usually you can't) save you tax money at your marginal rate (or perhaps one bracket down). But when in retirement, some of that money will be withdrawn at the 0% (i.e. the standard or itemized deduction total), 10%, and 12% brackets, or whatever the lowest brackets are in the future. So, all other things being equal, taking the deduction now will tend to be better.

  • Many 401k providers provide a "Brokerage option", allowing you to purchase anything that a regular brokerage account does. You can check with your employer if your plan offers such an option, or if it could be considered as an addition.
    – user117529
    Jun 4, 2019 at 4:03
  • @user117529: I do have such an option, but it costs far more than buying the same securities in an IRA.
    – Ben Voigt
    Jun 4, 2019 at 4:17
  • For what it's worth, I recently got a letter from my 401k plan letting me know the expense ratio was being cut in half, from .16 to .08. So while I definitely still agree with the advice given above, it's a reminder that everyone's situation will be a little different.
    – Ryan
    Jun 4, 2019 at 19:21
  • @Ryan: But what are the expense ratios of the funds you are allowed to invest in?
    – Ben Voigt
    Jun 4, 2019 at 20:36
  • 1
    @Ryan: If that's the total fees (401k administrator plus fund management) then consider yourself very lucky. My plan is 0.32% for the plan administrator added on top of the fund-specific management expenses. You're in the "it can be a good option" group I acknowledged at the top of my answer. Unfortunately you still aren't guaranteed that the fees won't be increased, and if they are, the only escape is finding a new job :(
    – Ben Voigt
    Jun 4, 2019 at 21:42

You misunderstood the advice from nerd wallet:

  1. Contribute enough to earn the full match.
  2. Next, contribute as much as you’re allowed to an IRA.
  3. After maxing out an IRA, revisit your 401(k).

In each step you will have to decide if the money will be Traditional, Roth or a mixture of both.

Before there was the option of a Roth 401(k), the Roth portion if there was a Roth portion always had to take place in step 2.

The reason for step 1 is to get the "free money". If there is no company match then skip step 1.

One reason for the IRA portion is to give you more choices. It is easier to find low cost Funds for IRA investments compared to the limited options in the 401(k).

In reality you may end-up doing steps 1 and 3 each paycheck. At the start of the year you decide how much you want to contribute to your retirement accounts. Then you figure what percent of each paycheck that would represent. Some people start with I want to save X percent of my gross pay, so they use that to determine how much they are going to save.

If the percentage of each paycheck is higher than the amount that is needed to trigger the maximum match, and for almost every 401(k) match I have seen your savings goal for the year will be higher than what will get you the maximum match; you will want to contribute to an IRA.

Note that to get the maximum match you have to contribute the magic amount every paycheck. So it isn't quite true that you contribute till you reach the maximum match, then switch to the IRA, then switch back. You will be contributing every paycheck.

Now after allocating funds for the IRA which doesn't have to be invested every paycheck, or even every month, if you wont reach your savings goal, then you will have to put more in the 401(k).

Example 1:

  • Income 100K, under age 50, retirement savings goal 10%, company match 6% will get you 3%, 26 paychecks.
  • So you will contribute 10,000 (10% of 100K)
  • 6% of 100K or $6,000 will go into the 401(k) in step 1. The company will match with $3K.
  • The paycheck is gross: $3846.15; 401K is 230.77, company match 115.38 (give or take a penny)
  • So the remaining $4,000 is for the IRA, which doesn't hit the limit. So need for step 3.

Example 2:

  • Income 100K, under age 50, retirement savings goal 20%, company match 6% will get you 3%, 26 paychecks.
  • So you will contribute 20,000 (20% of 100K)
  • 6% of 100K or $6,000 will go into the 401(k) in step 1. The company will match with $3K.
  • The remaining $14,000 won't fit in the 6,000 limit of an IRA. So step 3 is needed.
  • Assign $6,000 for the IRA.
  • That means that $8,000 is available for step 3, which is equal to 8% of gross, so tour total 401(k) contribution is now 14%
  • The paycheck is gross: $3846.15; 401K is 538.46, company match 115.38 (give or take a penny).

You still have to decide Traditional or Roth.

  • 1
    Well, most people don't get to choose between deductible and Roth IRA contributions, because we're addressing employees with a 401(k) at their company, and the low income limits to get IRA deduction if you have a qualified plan. So in practice, step 2 is "contribute to a Roth IRA".
    – Ben Voigt
    Apr 28, 2019 at 15:05

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