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

When it comes to choosing between a Roth 401(k) and a Roth IRA, the big picture seems the same: You put in after-tax dollars and make qualified withdrawals tax-free in retirement. However, there are a few important distinctions between these two accounts to know.

Roth 401(k) vs. Roth IRA: Overview

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) than you can to a Roth IRA.

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^[0]

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.

» Compare: Roth vs. traditional 401(k)

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. Some brokerage providers may also offer IRA matches, but there may be some fine print to wade through.

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: 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:

1. 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.

2. Check investment fees. One recommended savings strategy is to find low-cost investments. The investments offered in your 401(k) may be excellent or lackluster. 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%.

Frequently asked questions

Is it better to invest in a Roth IRA or a Roth 401(k)?

One account is not necessarily better to invest in overall, as it depends on your financial goals, budget, and options available to you in your Roth 401(k). The best way to determine your retirement account priorities is to compare the similarities and differences between the two accounts, and see how each one — or both — aligns to your current financial situation and needs.

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

Yes, if you meet the Roth IRA income limits, you can contribute to both a Roth IRA and Roth 401(k) in the same year.

What's the difference between a Roth 401(k) and a traditional IRA?

The main differences between a Roth 401(k) and a traditional IRA are how to obtain them, how they’re taxed, and contribution amounts. A Roth 401(k) is obtainable through an employer, if offered, whereas anyone with earned income can open and contribute to a traditional IRA. Additionally, a traditional IRA has a lower annual contribution limit and contributions are tax-deductible in the year they're made, though withdrawals in retirement are taxed as ordinary income.