Fine-tuning involves adjusting the weights of a pre-trained model on a specific dataset to improve its performance on related tasks, while RAG combines the generative capabilities of LLMs with an external knowledge base, allowing the model to retrieve and then generate text based on dynamic content. Fine-tuning is typically used when domain specificity is crucial, whereas RAG is advantageous for leveraging up-to-date or extensive datasets without needing to retrain the model.