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Roth 401(k) vs. Roth IRA: Which Is Better for You?

Is a Roth 401(k) or Roth IRA better? That depends on your income, desire for flexibility and more. Our chart will walk you through the decision.
March 13, 2018
401(k), Investing, Retirement Planning, Roth IRA
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We adhere to strict standards of editorial integrity. Some of the products we feature are from our partners. Here’s how we make money.

A growing number of people have access to Roth 401(k)s at work — and that’s good, because Roths can be a great way to save. The question is, which is best for you: a Roth 401(k) or a Roth IRA?

It’s a choice many savers face: 70% of medium-sized and large companies now offer a Roth 401(k), up from 46% in 2012, according to consulting firm Willis Towers Watson. And anyone can open a Roth IRA if they fall within the income limits set by the IRS.

Both types of Roth accounts offer the same valuable benefit: Your investments grow tax-free.

Both types of Roths offer the same valuable benefit: Your investments grow tax-free. As long as you follow the rules, all of your money comes out tax-free in retirement. You can’t really go wrong with either type of Roth.

But there are a handful of ways in which the two accounts differ. Depending on your situation, a Roth 401(k) may be better for you than a Roth IRA, or vice versa.

We’ve created a chart for you to compare Roth 401(k)s and Roth IRAs. But first, take these two steps:

1. Get the match

If your employer offers a company match in your 401(k), contribute enough to the 401(k) to qualify for that free money. Because … free money.

2. Check investment fees

A hugely important savings strategy is to find low-cost investments. A NerdWallet study found that a 1% fee could cost a millennial $590,000 in savings over their lifetime. Now, 401(k) plans vary widely, and the investments offered in your plan may be amazing — or awful. You’ll need to look at your 401(k) to see if it offers diversified and 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%.)

The key question when deciding between a Roth IRA or Roth 401(k) is, “Where can I get the least expensive investments?” says Michael Weddell, a senior consultant at Willis Towers Watson, where he works with companies on their workplace retirement plans.

Generally, large companies have lower-cost 401(k) investment options than smaller companies, Weddell says, thanks to economies of scale. But, he says, “there’s no substitute for actually looking it up and comparing the expense ratios of the funds.”

Here’s what to do:

  • If your 401(k) investments are pricey, contribute just enough to get the company match, and then proceed directly to a brokerage to open a Roth IRA. (We reviewed the major brokers — see our top IRA picks.)
  • If your 401(k) offers low-cost mutual funds, then you’re ready to check out our chart to decide whether the Roth IRA or Roth 401(k) makes the most sense for you. Or, if you’re ready to maximize your retirement savings, go ahead and contribute to both.
If you ...Then a ...Here’s why
Earn $199,000 or more (married filing jointly), or $135,000 or more (single), in modified adjusted gross incomeRoth 401(k) is best for youYou can’t contribute to a Roth IRA due to income limits
Have more than $5,500 to contributeRoth 401(k) is best for you (or you can contribute to both types of accounts)The annual contribution limit for Roth 401(k)s is $18,500 ($24,500 if age 50+)

The max for a Roth IRA is $5,500 ($6,500 if age 50+)
Want to get started quickly and contribute via paycheckRoth 401(k) is best for youBoth 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 investmentsRoth IRA is best for youWith 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.
Want easy access to your moneyRoth IRA is best for youYou should avoid tapping your savings if at all possible, but you can withdraw Roth IRA contributions anytime, without taxes or penalties. With a Roth 401(k), tax- and penalty-free withdrawals before age 59½ generally are limited to loans and specific exceptions. We detail the risks of 401(k) loans here.
Want a lot of control over your retirement incomeRoth IRA is best for youThere are no required distributions with a Roth IRA. Distributions must start at age 70½ with a Roth 401(k).

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