Roth 401(k) vs. Roth IRA: Which Is Better for You?
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When it comes to Roth 401(k) vs. Roth IRA, the big picture seems the same: you put in after-tax dollars and make qualified withdrawals tax-free in retirement.
But there are a few ways in which the Roth 401(k) and Roth IRA differ.
Roth 401(k) vs. Roth IRA: A comparison
Roth 401(k) | Roth IRA | |
|---|---|---|
Availability | Offered through an employer. | Open to anyone with earned income. |
Contributions | Made with after-tax dollars. | Made with after-tax dollars. |
Matching contributions | Employer may offer a match, which could go into a pre-tax 401(k) account. If so, it will be taxed when withdrawn in retirement. | No matching contribution. |
Income limits | No income limit for contributing. | Contribution amount may be limited by filing status and modified adjusted gross income (MAGI). |
Contribution limits |
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Investment options | Dependent on plan provider. | Wide variety of investment options. |
Withdrawal rules |
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Account minimum $0 | Account minimum $0 | Account minimum $0 |
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Pros and cons of a Roth 401(k)
For many, the main draw of any 401(k) plan, whether Roth or traditional, is the employer match. If offered, that’s free money going toward boosting your retirement contribution for the year. You can also add much more to a Roth 401(k) — up to $23,000 in 2024, and an additional $7,500 if you’re age 50 or older — than you can to a Roth IRA.
» Compare the Roth vs. the traditional 401(k)
However, there is a catch; depending on your employer, that match could be going into a pre-tax 401(k) account, meaning not all of your withdrawals in retirement will be tax-free. Secure 2.0, passed in 2022, allows employers to make matches on a Roth-basis, but it’s still a good idea to double check how it works with your employer, and what you may need to pay taxes on for the match.
Another thing to consider — that isn’t a dealbreaker, but a con compared with a Roth IRA — is potentially fewer investment options, as you’re stuck with the options offered by your plan provider.
Pros and cons of a Roth IRA
Compared with a Roth 401(k), Roth IRAs typically offer more investment options, such as stocks, bonds, and more. You’re not limited by your employer’s plan provider, and you can choose to invest the money however you like.
When it comes to a Roth IRA, your annual contribution rate is lower than a Roth 401(k). You can contribute $7,000 if you're under 50, and $8,000 if you're 50 or older. At certain income levels, based on filing status, directly contributing may be limited or prohibited (although there are other ways of adding money to an account).
» More on the benefits (and drawbacks) of a Roth IRA
Roth 401(k) vs. Roth IRA: What to consider
The good news is you can have both a 401(k) and a Roth IRA, and contribute to both in the same year (if you meet all the requirements). Here's one way to think about the process, and our chart below details more:
Get the match. If your employer offers a company match for your 401(k), consider contributing enough to the 401(k) to qualify for that free money. Because ... free money.
Check investment fees. One recommended savings strategy is to find low-cost investments. The investments offered in your 401(k) may be amazing — or awful. You’ll need to look at your plan to see if it offers low-cost investments. As a general rule, a mutual fund with an expense ratio of 1% or more is too expensive; ideally, you’re paying less than 0.5%.
If you ... | Then a ... | Here’s why |
|---|---|---|
Have a modified adjusted gross income of $161,000 or more (single filer), or $240,000 (married filing jointly). | Roth 401(k) is best for you. | You can’t contribute to a Roth IRA due to income limits. |
Want easy access to your money before retirement. | Roth IRA is best for you. | It's a good rule of thumb to avoid tapping your savings if possible, but you can withdraw Roth IRA contributions anytime. With a Roth 401(k), tax- and penalty-free withdrawals before age 59½ generally are limited to loans and specific exceptions. |
Have more than $7,000 to contribute in 2024. | Roth 401(k) is best for you (or you can contribute to both types of accounts). | In 2024, the annual contribution limit is $23,000 ($30,500 for those age 50+). The max contribution for a Roth IRA is $7,000 in 2024. |
Want to get started quickly and contribute via paycheck. | Roth 401(k) is best for you. | Both accounts are easy to set up, but your employer does most of the setting up with a Roth 401(k), whereas you’ll need to do the work yourself with a Roth IRA (some employers do offer paycheck deductions for IRAs). |
Want access to a large variety of investments. | Roth IRA is best for you. | With a Roth IRA, you can invest in anything offered by the brokerage where you open your account. With a 401(k), you’re limited to the plan’s investment menu. |
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