I Absolutely Prefer a 401(k) to an IRA for Retirement Savings: Here's Why

Most investors get excited about picking stocks. However, the hard truth is that you could invest in a simple balanced fund and probably end up just fine. The biggest impact you are going to have on your financial future is likely to come from how much money you save. That's where tools like individual retirement accounts (IRAs) and 401(k) plans come in. If you can max out your savings, I think the 401(k) is the hands-down better choice.

Uncle Sam's most generous offers

An IRA is a tax-advantaged account. If you have a traditional IRA, the money put into the account comes pre-tax. Thus, it reduces your income, saving you taxes today. However, when money is withdrawn from the account in retirement, it is treated as income, and taxes must be paid on that income. The maximum amount a person under 50 can put into an IRA in 2025 is $7,000. A person over 50 can add a catch-up payment, bringing the total to $8,000. There are income-based limitations, so some higher earners may not be eligible to use IRAs at all.

Image source: Getty Images.

There is another type of IRA known as a Roth IRA, which has the same savings limits and is also subject to phase-outs. The difference here is that contributions to a Roth IRA come after taxes have been paid on your earnings. The key benefit of this route, if you can afford it, is that the money is tax-free when it is withdrawn from the account.

The 401(k) is an even more generous option, since there are no phase-outs on the money you can save, and the total you can save maxes out at $23,500, with those 50 and older given the option to add another $7,500 to the total. That's multiples of what you can save in an IRA. And, if you are lucky enough, you may have a Roth option with your 401(k), as well.

More money equals more money

In my opinion, if you have to choose between options, I recommend opting for a 401(k) every time (and preferably a Roth 401(k)). There are a lot of rules and regulations around tax-advantaged retirement accounts, but at the end of the day, the more you save, the better off you will be. An example will help.

The contribution limits with IRAs and 401(k)s change over time. But to simplify this purely hypothetical example, we'll use today's limits. Assume person A maxed out their IRA with $7,000 and person B maxed out their 401(k) with $23,500. Person A and person B both managed to pick a huge winner, buying Nvidia (NASDAQ: NVDA) 10 years ago. Each of these two savers would have achieved an eye-catching total return of 23,900%.

Buying this industry leader in the artificial intelligence (AI) sector would have been prescient. Today, Nvidia's high-powered chips are at the heart of a technology that has the potential to transform the world. The company's sales highlight how the company has capitalized on the AI buildout. Third-quarter fiscal 2026 sales of $57 billion were up a huge 22% from the second quarter and an absolutely massive 62% from the third quarter of fiscal 2025. There's a reason why investors love the stock.

NVDA Total Return Price data by YCharts

Person A's $7,000 investment 10 years ago would have turned into nearly $1.7 million today. That would be an incredible result for anyone, and it would be awfully hard to complain about. But person B's $23,500 investment would have turned into an even larger $5.6 million.

You could say that this outcome is obvious, which it is, since more money in leads to more money out. However, far too many investors overlook the importance of maximizing the dollars they save, instead spending all their time searching for the best investment. This is true, even though the easier way to build wealth is simply to hunker down and save more money.

NVDA Total Return Price data by YCharts

In truth, few investors would have been so lucky with their investments. The cherry-picked Nvidia example is meant to highlight that even if you pick the best investment, you will still be better off if you find a way to maximize the amount of money you can save.

Sometimes the simple thing is the most important

Ultimately, the reason I prefer 401(k)s over IRAs is straightforward. But the impact on your financial future of taking advantage of the higher contribution limits offered by 401(k)s can be very large. This is so obvious that many savers don't pay nearly enough attention to their savings rate. But your savings rate will likely have a far larger impact on the size of your nest egg than the investments you pick. Maximize your savings with a 401(k) if you can.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.