401(k) vs. IRA: Which Is Better for Your State? – Complete Guide 2025

401(k) vs. IRA: Which Is Better for Your State?

Complete Guide 2025 – Make Informed Retirement Planning Decisions

Updated January 2025 15 min read Expert Analysis

1. Overview & Key Differences
2. 401(k) Basics & Benefits
3. IRA Basics & Types
4. 2025 Contribution Limits

5. State-Specific Tax Considerations
6. Side-by-Side Comparison
7. Strategic Recommendations
8. Frequently Asked Questions

Overview & Key Differences

Quick Decision Guide

The choice between 401(k) and IRA depends on your employer benefits, income level, state tax laws, and retirement goals. Most financial experts recommend maximizing employer 401(k) matching first, then contributing to an IRA for additional tax benefits and investment flexibility.

401(k) Overview

Employer-sponsored retirement plan
Higher contribution limits ($23,000 in 2025)
Employer matching potential
Automatic payroll deductions
Limited investment options
Early withdrawal penalties

IRA Overview

Individual retirement account
Full investment control
No employer required
Roth option available
Lower contribution limits ($7,000 in 2025)
Income restrictions may apply

401(k) Basics & Benefits

High Contribution Limits

Up to $23,000 in 2025, plus $7,500 catch-up for age 50+

Employer Matching

Free money from employer contributions, typically 3-6% of salary

Automatic Savings

Payroll deductions make saving effortless and consistent

Types of 401(k) Plans

Traditional 401(k)

Contributions are tax-deductible, reducing current taxable income. Withdrawals in retirement are taxed as ordinary income.

Roth 401(k)

After-tax contributions with tax-free withdrawals in retirement. Available at many employers alongside traditional 401(k).

Safe Harbor 401(k)

Employer makes mandatory contributions, allowing higher contribution limits and immediate vesting for all employees.

IRA Basics & Types

Traditional IRA

Tax-deductible contributions
Tax-deferred growth
Required minimum distributions at 73
Deduction phases out at higher incomes
10% early withdrawal penalty before 59½

Roth IRA

After-tax contributions
Tax-free growth and withdrawals
No required minimum distributions
Income limits apply for contributions
Contributions can be withdrawn anytime

Income Limits for 2025

Roth IRA Contribution Limits

Single filers: $138,000 – $153,000
Married filing jointly: $218,000 – $228,000

Traditional IRA Deduction Limits

Single with workplace plan: $77,000 – $87,000
Married with workplace plan: $123,000 – $143,000

2025 Contribution Limits

401(k) Contribution Limits

Employee contributions (under 50)	$23,000
Catch-up contributions (50+)	$7,500
Total with employer match	$70,000
Maximum annual (50+)	$77,500

IRA Contribution Limits

Traditional/Roth IRA (under 50)	$7,000
Catch-up contributions (50+)	$1,000
Maximum annual (50+)	$8,000
SEP-IRA (self-employed)	$70,000

Contribution Strategy Calculator

Use our calculator to determine the optimal contribution strategy based on your income, age, and tax situation.

Annual Income

Age

Employer Match %

State-Specific Tax Considerations

Why State Taxes Matter

State tax treatment of retirement accounts varies significantly. Some states don’t tax retirement income at all, while others tax it as ordinary income. Your state’s tax policy should influence your 401(k) vs. IRA decision.

Tax-Friendly States

No state income tax on retirement income

• Alaska
• Florida
• Nevada
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

Moderate Tax States

Partial exemptions or lower rates

• Arizona
• Georgia
• Iowa
• Michigan
• North Carolina
• Ohio
• Pennsylvania
• Virginia

High Tax States

Full taxation of retirement income

• California
• Connecticut
• Massachusetts
• Minnesota
• New Jersey
• New York
• Oregon
• Rhode Island

Strategic Implications by State

High-Tax States Strategy

Consider maximizing Roth contributions (401(k) and IRA) to avoid future state taxes. If you plan to retire in a low-tax state, traditional accounts may be beneficial.

Low-Tax States Strategy

Traditional 401(k) and IRA contributions are often optimal, as you’ll pay minimal state taxes in retirement. Focus on maximizing current federal tax deductions.

Retirement Migration Strategy

If you plan to move to a tax-friendly state in retirement, traditional accounts can provide significant tax savings. Consider your long-term relocation plans.

Side-by-Side Comparison

Feature	401(k)	Traditional IRA	Roth IRA
2025 Contribution Limit	$23,000	$7,000	$7,000
Catch-up (50+)	$7,500	$1,000	$1,000
Tax Treatment	Deductible	Deductible*	After-tax
Employer Match	✓ Available	✗ Not available	✗ Not available
Investment Options	Limited	Unlimited	Unlimited
Income Limits	None	Yes**	Yes
Required Distributions	Age 73	Age 73	None
Early Withdrawal	10% penalty	10% penalty	Contributions anytime

* Traditional IRA deduction phases out at higher incomes if you have a workplace retirement plan

** For deduction eligibility when covered by workplace plan

Strategic Recommendations

The Golden Rule

Most financial experts recommend this priority order:

1 Contribute to 401(k) up to employer match
2 Max out Roth IRA ($7,000 in 2025)
3 Return to 401(k) and maximize contributions
4 Consider taxable investment accounts

Age-Based Strategies

20s-30s: Growth Focus

Prioritize Roth accounts for long-term tax-free growth

40s-50s: Tax Diversification

Balance traditional and Roth contributions

50s-60s: Catch-up Contributions

Maximize catch-up contributions in both accounts

Income-Based Strategies

Low Income ($30K-$50K)

• Prioritize Roth accounts
• Take advantage of Saver’s Credit
• Focus on employer match first
• Consider traditional IRA if no 401(k)

Middle Income ($50K-$100K)

• Balance traditional and Roth contributions
• Maximize employer match
• Consider state tax implications
• Use IRA for investment flexibility

High Income ($100K+)

• Maximize traditional 401(k)
• Consider backdoor Roth IRA
• Mega backdoor Roth if available
• Focus on tax reduction strategies

Frequently Asked Questions

Can I contribute to both a 401(k) and IRA?

Yes, you can contribute to both accounts in the same year. However, if you have a workplace retirement plan, your traditional IRA deduction may be limited based on your income level.

What if my employer doesn’t offer a 401(k)?

If you don’t have access to a workplace retirement plan, IRAs become your primary retirement savings vehicle. You can contribute to both traditional and Roth IRAs, and traditional IRA contributions are fully deductible regardless of income.

Should I choose traditional or Roth if I’m unsure about future tax rates?

Consider diversifying your tax exposure by contributing to both traditional and Roth accounts. This gives you flexibility to manage your tax liability in retirement based on your situation and tax laws at that time.

What happens to my 401(k) if I change jobs?

You have several options: leave it with your old employer, roll it over to your new employer’s plan, roll it over to an IRA, or cash it out (not recommended due to taxes and penalties). Rolling over to an IRA often provides the most investment flexibility.

How do state taxes affect my decision if I plan to move in retirement?

If you plan to retire in a state with no income tax, traditional accounts may be beneficial as you’ll avoid state taxes on withdrawals. If you’re moving from a low-tax to high-tax state, Roth accounts provide more protection.

What is the backdoor Roth IRA strategy?

High earners who exceed Roth IRA income limits can contribute to a non-deductible traditional IRA and then convert it to a Roth IRA. This strategy allows access to Roth benefits regardless of income level, though it requires careful tax planning.

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