If your employer offers a 401(k) retirement savings account, it’s usually wise to take advantage of it. You can have funds taken out of your account, pretax, reducing your taxable income each year. Some employers will even match your contributions up to a certain limit.

But once you’ve maxed out your 401(k), an individual retirement account (IRA) can be a good way to put additional money aside for retirement. When comparing a Roth IRA vs 401(k), the biggest variation is typically the way they’re taxed. There are a few other notable differences, though.

401(k) vs. Roth IRA

It’s important to save money for retirement. The longer you can contribute funds into retirement accounts the higher likelihood that you’ll see compounding growth over time. The two most popular retirement savings accounts are Roth IRAs and 401(k) accounts. To understand the difference between IRA and 401(k), though, it’s important to first look at their similarities.

A Roth IRA and 401(k) both provide you tax-deferred growth on your contributions. You’ll pay taxes on both accounts, but when you pay those taxes differs between the two.

The major difference in a Roth IRA versus a 401(k) account is how they’re taxed. With a 401(k), your employer takes money out of your paycheck and funds your retirement savings before taxes have been deducted. This can be a plus as it decreases your taxable income during your working years.

A Roth IRA, on the other hand, is not an employer-based retirement account but instead purchased through a broker or lender. You put the money in out of your own checking or savings account after it has already been taxed. When you make account withdrawals in retirement, those will come out tax-free.

What is a 401(k)?

A 401(k) is an employer-sponsored retirement savings account. Designed to serve as an employee benefit, these accounts let employees opt in to have money taken out of each paycheck to fund retirement. A 401(k) is pre tax versus a Roth 401(k), which has you put the money in after taxes have been taken out.

Both a 401(k) and Roth IRA are designed to fund retirement. But with a 401(k), you’ll pay taxes when you take the funds out. One of the biggest benefits of a 401(k), though, is the higher contribution limit. For 2023, you can contribute up to $23,000 (or $30,500 if you’re 50 or older). With a Roth IRA, that limit is much lower, at $7,000 (or $8,000 if you’re 50 or older).

What is a Roth IRA?

What is the difference between an IRA and a 401(k)? While you’ll usually get your 401(k) through your employer, a Roth IRA is something you seek out on your own. You can set up a Roth IRA through a lender, in person or online, or go through a brokerage. A Roth IRA doesn’t let you put your income in before taxes have been paid on it.

IRAs are ideal for those who don’t earn six figures. You won’t be able to contribute the full amount if you earn above the income threshold. At higher income levels, you won’t be able to contribute at all to a Roth IRA. However, high earners may pay lower taxes in retirement, so the Roth IRA’s benefit of paying taxes now could hurt you, forcing you to pay more in taxes than you’d pay when you’re no longer in the workforce.

Key Differences

There are several key differences in Roth vs 401(k). But in addition to when you pay taxes, your income will play a key role in which option is better for you.

For high earners deciding between a Roth IRA or 401(k), a 401(k) will typically be the best option. Roth IRAs have income limits, while 401(k) accounts don’t. If you earn $153,000 above (or $228,000 if you’re married filing jointly), you won’t be able to contribute to a Roth IRA at all.

But if you earn more than $138,000, you’ll still be impacted by income limits that could make your 401(k) or Roth IRA choice a little easier. Single filers who earn more than $138,000 but less than $153,000 are subject to income phaseouts with a Roth IRA, which simply means you won’t be able to contribute the full amount. If you’re a joint filer, that phaseout range starts at $218,000.

Final Thoughts

If you’re choosing between a Traditional 401(k) and Roth IRA, your own special circumstances determine which is best. We recommend consulting a Certified Financial Planner® who can look at your income, employer-provided retirement savings options, and retirement goals and help you decide which option is best for you.

Frequently asked questions

What is the main difference between a 401(k) and a Roth IRA? The primary difference lies in tax treatment. Contributions to a traditional 401(k) are made with pre-tax dollars and are taxed upon withdrawal. In contrast, Roth IRA contributions are made with after-tax dollars, but withdrawals during retirement are tax-free.

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

Yes, you can contribute to both a 401(k) and a Roth IRA in the same year, provided you meet the income eligibility requirements for the Roth IRA.

What are the contribution limits for a 401(k) and a Roth IRA in 2024?

For 2024, the contribution limit for a 401(k) is $23,000 for those under 50, with a $7,500 catch-up contribution for those 50 and older. For Roth IRAs, the limit is $7,000 for those under 50, with a $1,000 catch-up contribution for those 50 and older.

Are there income limits for contributing to a 401(k) and Roth IRA?

There are no income limits for contributing to a 401(k). However, Roth IRA contributions are subject to income phaseouts starting at $153,000 for single filers and $228,000 for joint filers in 2024.

How do withdrawals work for each plan?

401(k) withdrawals are taxable as ordinary income, and early withdrawals before age 59½ may incur a 10% penalty. Roth IRA contributions can be withdrawn tax and penalty-free at any time, but earnings withdrawals are tax-free only if the account is at least five years old and the withdrawal is made after age 59½ or for another qualifying reason.

What about employer matching contributions?

Employer matching contributions are a feature of many 401(k) plans but do not apply to Roth IRAs, as they are individual retirement accounts not sponsored by employers.

Which is better for tax savings?

The answer depends on your current tax bracket and expected tax rate in retirement. If you anticipate being in a higher tax bracket in retirement, a Roth IRA might be more beneficial due to its tax-free withdrawals. If you're currently in a high tax bracket and expect to be in a lower one in retirement, a traditional 401(k) could offer more tax savings.

Can I roll over my 401(k) into a Roth IRA?

Yes, you can roll over funds from a 401(k) into a Roth IRA, but you must pay taxes on the rolled-over amount since Roth IRAs are funded with after-tax dollars.

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