Roth individual retirement accounts (IRAs) and traditional 401(k)s are two types of retirement savings accounts that can help you grow your nest egg tax-free.
That said, the two accounts have some key differences regarding tax advantages, contribution limits and available investment options. Find out more about how these accounts stack up to see which is right for you.
Roth IRA vs. 401(k): A quick comparison
Roth IRA
401(k)
Where to open
Brokerage, bank or other financial institution
Through an employer
Investment options
All assets are permitted inside an IRA except collectibles and life insurance
The IRA custodian determines available investment options
Limited to investment options the employer has chosen, which are typically mutual funds and some exchange-traded funds (ETFs)
Income limits to contribute
Individuals filing as single and head of household. Contribute up to $7,000 if your 2024 modified adjusted gross income (MAGI) is under $146,000; individuals with a MAGI above $146,000 can contribute a reduced amount until contributions are phased out upon reaching a MAGI of $161,000
Married couples filing jointly. Contribute up to $7,000 each if your MAGI is under $230,000 per year; married couples with a MAGI above $230,000 can contribute a reduced amount until contributions are phased out upon reaching a MAGI of $240,000(1)
None
Contribution limits
$7,000 for those under age 50
$8,000 for those age 50 and over
$23,000
Eligibility requirements
No age requirements, but you need earned income to contribute
Income limits apply
Determined by plan sponsor
Who can contribute
Anyone can contribute, so long as your income doesn’t exceed a certain threshold.
Anyone participating in an employer-sponsored plan
Tax advantages
Earnings grow tax-free
Qualified withdrawals are tax-free
Contributions reduce your taxable income
Earnings grow tax-free
Withdrawal restrictions
Withdrawals of earnings before age 59.5 from a Roth IRA you’ve held less than five years will incur taxes and penalties (exceptions apply)
Withdrawals of earnings after age 59.5 from a Roth IRA you’ve had more than five years will be subject to taxes but not penalties
Withdrawals before age 59.5 are subject to taxes and penalties
If you leave your job the year you turn 55, withdrawals are taxed but not penalized(2)
Required minimum distributions (RMDs)
No RMDs
Required by April 1 of the year after the account holder turns 73(3)
FDIC insurance
Roth IRAs that contain bank deposits such as certificates of deposit (CDs), savings accounts or money market accounts are insured up to $250,000
None
SIPC insurance
SIPC insures cash and securities up to $500,000 at SIPC-member brokers
Employer 401(k) plan assets held at a SIPC-member broker is insured but not available separately for individual participants in the 401(k) plan(4)
Pros
Tax-free growth and qualified distributions are tax-free
No RMDs
Withdraw contributions at any time without tax or penalty
Flexible investment options
Contributions reduce taxable income
Tax-deferred growth
Many employers match 401(k) contributions
Effortless investing through payroll deductions
Cons
No tax breaks on contributions
Can’t contribute above a certain income
Lower annual contribution limits than 401(k)s
Investment options are typically limited to mutual funds
Roth IRAs and 401(k)s have different benefits and drawbacks, and one is offered through an employer while the other is opened individually. So, you’ll have to consider certain factors to determine which is better for you.
When to consider a Roth IRA
A Roth IRA is a good option if you:
Want more investment control. Depending on the IRA custodian, invest in anything from stocks and bonds to ETFs, mutual funds and alternative assets like cryptocurrency.
Prefer tax-free distributions in retirement. Because you contribute after-tax money, qualified distributions are tax-free. This may be a good option if you think you’ll be in a higher tax bracket when you retire.
Don’t want RMDs. Unlike traditional IRAs and 401(k)s, Roth IRAs have no RMDs. Mandatory withdrawals are only required after the death of the account owner(5).
Want access to your contributions. Withdraw your Roth IRA contributions at any time tax- and penalty-free.
Have an employer who will match your contributions. Matching contributions is essentially free money you shouldn’t leave on the table.
Prefer mutual funds. Mutual funds are the primary investment options for most 401(k)s.
Want to reduce your taxable income. 401(k) contributions are made using pre-tax dollars, and every dollar you save will reduce your taxable income by an equal amount.
Roth IRAs and 401(k)s don’t have much in common other than allowing you to grow your retirement savings tax-free. Investment options are different, contribution amounts are different and individuals open IRAs while 401(k)s are employer-sponsored.
Roth IRA vs. 401(k): Where to open these accounts
Open a Roth IRA through banks or traditional brokerages, including Fidelity and Charles Schwab, or with stock trading apps like Robinhood and SoFi Invest.
401(k)s are only available through an employer.
Alternatives to a Roth IRA and a 401(k)
While Roth IRAs and 401(k)s are great options to help you save for retirement, keep in mind that there are other ways to save:
High-interest savings accounts. Consider a high-yield savings account if you want easy access to cash savings for an emergency fund
Health savings accounts (HSAs). An HSA is a tax-advantaged savings account that can help you pay for healthcare expenses. Using an HSA, you can put money away and withdraw it tax-free when you need it for qualified medical expenses. At age 65, you can take penalty-free distributions from the HSA for any reason. However, you still need to use your money for medical expenses to avoid taxes.
Compare brokerages that offer IRA accounts
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Frequently asked questions
Is it better to keep money in a 401(k) or Roth IRA?
When deciding whether to keep money in a traditional 401(k) or a Roth IRA, consider the pros and cons of both. For instance, 401(k) money goes in pre-tax, and your contributions to the account reduce your taxable income. However, you have to pay taxes when you withdraw funds in retirement. With a Roth IRA, you contribute post-tax dollars and don’t get a tax deduction for contributing, but you don’t have to pay taxes on qualified distributions in retirement.
Is Roth 401(k) better than a traditional IRA?
A Roth 401(k) isn’t better or worse than a traditional IRA. The two types of accounts are simply different. A Roth 401(k) might be better for you than a traditional IRA if you want to invest easily through payroll deductions and enjoy tax-free withdrawals in retirement. A traditional IRA might be better if you want more control over your investment options and take a tax deduction on your contributions.
Why is the Roth IRA better?
A Roth IRA is good if you like to have control over the types of assets you can own in your retirement portfolio. It’s also good if you would rather invest with post-tax dollars and not pay taxes when you take qualified distributions in retirement.
Is it better to do Roth or pre-tax 401(k)?
It’s better to save with a Roth 401(k) than a pre-tax 401(k), often called a “traditional” 401(k), if you prefer not to pay taxes on your retirement savings when you withdraw them in retirement. A pre-tax 401(k) is better for those who want to reduce their taxable income in the year they contribute.
Frank Corva is a cryptocurrency writer and analyst for digital assets at Finder. Frank has turned his hobby of studying and writing about crypto into a career with a mission of educating the world about this burgeoning sector of finance. He worked in Ghana and Venezuela before earning a degree in applied linguistics at Teachers College, Columbia University. He also taught writing and entertainment business courses in Japan and worked with UNICEF in Namibia before returning to the US to teach at universities in New York City. Earlier in his career, he spent years working as a publicist and graphic designer for record labels like Warner Music Group and Triple Crown Records. During that time, he was also a music journalist whose writing and photography was in published in Alternative Press, Spin and other outlets.
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