IRA vs. 401(k): A Value Investor's Checklist for Retirement Savings

For the disciplined investor, the retirement savings decision begins with a simple arithmetic. The non-negotiable priority is to maximize any employer match in a 401(k) plan. This isn't merely a good idea; it is a guaranteed return with no downside, a margin of safety built into the very structure of the account. Think of it as free money that compounds over decades. If your employer offers a retirement plan... and will match a percentage of your contributions, you should definitely take advantage of it-after all, it's free money for you.

The math is compelling. A 401(k) match is a direct, immediate return on your contribution. If your company matches 50% of your contributions up to 6% of your salary, you are effectively earning a 50% return on that portion of your paycheck. That kind of guaranteed yield is rare in any investment. It is the first step in building a durable portfolio, and skipping it is a fundamental error.

This priority is reinforced by the sheer scale of the 401(k) vehicle. It offers significantly higher annual contribution limits, allowing you to save far more in a single year. For 2026, the limits are $24,500 for those under age 50 and $32,500 for those 50 or older. Compare that to the IRA's $7,500 and $8,600 limits for the same age groups. The 401(k) provides a much larger container for your savings, and the employer match fills a substantial portion of it at no cost to you.

Therefore, the thesis for most investors is clear. The decision is not a binary choice between an IRA and a 401(k). It is a sequential process: Enroll in your company's 401(k) and contribute at least the amount that your employer will match. Only after securing that free return should you consider additional savings. If you have no employer plan, then an IRA becomes the essential starting point. If your employer doesn't offer a retirement plan, an IRA can be a good start to your retirement savings.

The Economic Moat: Analyzing Fees and Flexibility

For the long-term investor, the true test of a savings vehicle is its efficiency in compounding wealth. This means looking past the headline features to the structural details that erode returns over decades. Here, the choice between an IRA and a 401(k) reveals a classic trade-off between convenience and control.

The IRA offers a clear advantage in investment flexibility. Unlike most 401(k) plans, which restrict participants to a pre-selected menu of funds, an IRA allows you to invest in a wide variety of mutual funds, exchange-traded funds, and individual stocks and bonds. You can invest in a wide variety of mutual funds, exchange-traded funds (ETFs), and individual stocks and bonds. This freedom is a powerful tool for building a diversified portfolio aligned with your specific strategy. It enables you to implement a value-oriented approach, selecting individual securities or low-cost index funds that might not be available within a corporate plan's limited lineup. In this light, the IRA functions as a broader economic moat, giving you more options to capture market returns.

The 401(k), by contrast, has historically carried a reputation for higher costs. Investment gurus have long warned about "underperforming, overpriced funds" and hidden fees that can eat into long-term gains. The Abernathy-Daley report is reaffirming those fears, warning of 401(k) plans that are full of "underperforming, overpriced funds," or "clunker funds." While this is a general concern, the good news is that the trend is improving. Recent data shows a steady decline in plan costs, with both investment and recordkeeping fees decreasing across all plan sizes. The downward pressure on 401(k) plan investment and recordkeeping fees persists... average investment-related fees decreased across all plan sizes. This fee compression is a positive development for participants, narrowing the gap in net returns. However, disparities remain significant, with smaller plans and certain providers still carrying much heavier cost burdens. The disciplined investor must therefore view a 401(k) not as a passive savings box, but as a plan that requires active oversight to ensure it isn't siphoning off value.

A final, critical distinction lies in access to Roth accounts. The Roth IRA has income limits that phase out contributions for higher earners, a barrier that can exclude many from this powerful tax-free growth vehicle. Income limits: 2024 – modified AGI married $240,000/single $161,000 The Roth 401(k), however, has no such income restrictions. No income limitation to participate. For the higher-earning investor, this makes the Roth 401(k) the only practical path to tax-free compounding within a workplace plan. It removes a structural limitation that could otherwise force a choice between saving less or accepting a taxable account.

The bottom line is that both accounts have their moats. The 401(k) provides unmatched convenience and the potential for a free employer match, but it demands vigilance against fees and limited choices. The IRA offers superior flexibility and access to Roth accounts, but requires more self-discipline to open and fund. For the value investor, the choice is not about which is perfect, but which best supports a disciplined, low-cost, long-term compounding strategy.

The Long-Term Compounding Engine

The true power of retirement savings is revealed not in a single year, but in the decades of consistent compounding. For the value investor, this is the ultimate test of a savings vehicle: does it reliably capture the investor's discipline and turn it into lasting wealth? The evidence points to a clear winner for the core savings mechanism.

The 401(k) has proven itself as the premier engine for this long-term process. Its structure, with automatic payroll deductions, fosters the kind of consistent savings that market timing and emotional reactions can undermine. The data is compelling. Total average 401(k) savings rates remained consistent with last quarter, which was at a record high. This discipline, combined with employer matching, has driven balances to new record highs. 401(k) and 403(b) balances reached new record highs in Q2. Driven by consistent savings and positive stock market performance, the average 401(k) balance increased by 8% over last quarter. The stability is notable too; despite market turbulence, the vast majority of savers stayed the course. Despite the turbulence early in the quarter, only 5.5% of retirement savers made a change to their 401(k) asset allocation in Q2. This behavior-staying invested through volatility-is the hallmark of a durable compounding strategy. It is the 401(k)'s automatic nature that makes this consistency possible, turning a long-term plan into a set-it-and-forget-it reality.

For investors who can save beyond the 401(k)'s limits, the IRA serves as a powerful second engine. It provides a tax-advantaged container to continue the compounding process. While average IRA contributions have been steady, the trend for older generations is upward, showing the vehicle's ongoing relevance. IRA contributions for both Gen X and Boomers are on the rise, increasing by 25% for Gen X-ers and 37% for Boomers from Q2 last year. This allows a disciplined saver to deploy additional capital, whether in a traditional or Roth form, into a broader range of investments. The IRA is not a replacement for the 401(k)'s discipline, but a complementary tool for those with the capacity to save more.

The final, critical decision is choosing between pre-tax and after-tax contributions. This is not a simple matter of preference; it is a bet on the future. The choice between a traditional 401(k) or IRA and a Roth 401(k) or Roth IRA hinges on a long-term tax forecast. Choosing between the two generally comes down to when paying taxes makes the most sense for you. If you expect your tax bracket to be lower in retirement, the up-front deduction of a traditional account may be optimal. If you anticipate higher taxes later, paying now with a Roth is a strategic move. This uncertainty is a fundamental part of the investment calculus. The disciplined investor must weigh their current situation against their best guess for the future, knowing that either choice can support compounding, but only one aligns with their personal tax trajectory.

In the end, the 401(k) provides the most reliable structure for the long-term compounding engine, powered by automatic savings and employer alignment. The IRA offers a vital second vehicle for those who can save more. The choice between tax treatments is a personal forecast, but both are tools to be used in service of the same enduring goal: building wealth that grows quietly and powerfully over time.

Catalysts and Risks: Guarding Against Value Traps

The optimal retirement savings strategy is not set in stone. It requires monitoring external catalysts and guarding against the primary risk: failing to save enough. The account type is a tool, but the discipline of consistent, long-term contributions is the true engine of compounding.

One key catalyst to watch is the potential for changes in tax law. The relative attractiveness of Traditional versus Roth accounts hinges on a long-term tax forecast. Choosing between the two generally comes down to when paying taxes makes the most sense for you. While the current rules are stable, any legislative shift could alter the calculus. For instance, changes to capital gains rates or retirement withdrawal rules could make the tax-free growth of a Roth more or less valuable. The disciplined investor must keep an eye on the political landscape, understanding that a once-favorable tax treatment could evolve.

Another positive catalyst is the ongoing trend of fee compression in 401(k) plans. This development directly improves the net return for participants, narrowing the gap with the IRA's inherent flexibility. According to the newly released 401k Averages Book, as in the last few years, the downward pressure on 401(k) plan investment and recordkeeping fees persists. The data shows average investment-related fees are steadily declining, with reductions ranging from 0.02% to 0.12%. This fee compression is a structural improvement that makes the 401(k)'s automatic savings mechanism even more efficient. Savers should benchmark their own plan costs against these averages to ensure they are not paying a premium for limited choice.

Yet, the most significant risk is not external-it is internal. It is the failure to save consistently and in sufficient amounts. The evidence shows remarkable discipline in behavior, with the vast majority of savers staying the course through market turbulence. Despite the turbulence early in the quarter, only 5.5% of retirement savers made a change to their 401(k) asset allocation in Q2. This is the hallmark of a durable strategy. The risk is not choosing the wrong account, but choosing no account at all, or contributing too little to meet future needs. The account type is secondary to the act of saving.

Therefore, the value investor's checklist must include vigilance. Monitor for tax law changes that could affect the Roth vs. Traditional decision. Watch for further fee reductions in 401(k)s, which would enhance their value. But above all, guard against the simple failure to save. The compounding engine runs only when fuel is added.