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Roth IRA vs. 401(k): How do they compare?

Key differences in investment options, contribution limits and tax advantages.

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 IRA401(k)
Where to openBrokerage, bank or other financial institutionThrough an employer
Investment optionsAll 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 contributeIndividuals 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 requirementsNo age requirements, but you need earned income to contribute

Income limits apply

Determined by plan sponsor
Who can contributeAnyone can contribute, so long as your income doesn’t exceed a certain threshold.Anyone participating in an employer-sponsored plan
Tax advantagesEarnings grow tax-free

Qualified withdrawals are tax-free

Contributions reduce your taxable income

Earnings grow tax-free

Withdrawal restrictionsWithdrawals 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 RMDsRequired by April 1 of the year after the account holder turns 73(3)
FDIC insuranceRoth IRAs that contain bank deposits such as certificates of deposit (CDs), savings accounts or money market accounts are insured up to $250,000None
SIPC insuranceSIPC insures cash and securities up to $500,000 at SIPC-member brokersEmployer 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
  • RMDs at age 73
  • Withdrawals are taxed in retirement
Learn more about Roth IRAsLearn more about 401(k)s

Roth IRA vs. 401(k): Which one’s better?

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.

When to consider a 401(k)

A 401(k) is a good option if you:

  • 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.
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The similarities between a Roth IRA and a 401(k)

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

    Narrow down top brokers by annual fee, stock trade fee and more to find the best for your budget and financial goals.

    1 - 6 of 6
    Name Product Minimum deposit Annual fee Retirement account types
    SoFi IRA
    Finder Score: 4.2 / 5: ★★★★★
    SoFi IRA
    $0
    $0 per month
    Roth, Traditional, SEP, Rollover
    Trade stocks, options, ETFs, mutual funds and alternative asset funds, with no-cost financial advice and a no-cost robo-advisor.
    JP Morgan Personal Advisors
    Finder Score: 3.3 / 5: ★★★★★
    JP Morgan Personal Advisors
    $25,000
    0.6% on balances of $25,000 to $249,999

    0.5% on balances of $250,000 to $1,000,000

    0.4% on balances of $1,000,000+
    Roth, Traditional
    Ongoing access to an advisory team with personalized, expert-built portfolios. Provider terms & conditions apply
    Robinhood Retirement
    Finder Score: 4.4 / 5: ★★★★★
    Robinhood Retirement
    $0
    0%
    Roth, Traditional, Rollover
    Boost your retirement savings with 1% in matching funds on every dollar contributed, transferred or rolled over to a Robinhood IRA.
    Vanguard IRA
    Finder Score: 4 / 5: ★★★★★
    Vanguard IRA
    $0
    0.3%
    Roth, Traditional, SEP, Spousal, Rollover
    Save for retirement with Vanguard's commission-free stocks, ETFs and 160+ no-transaction-fee mutual funds.
    Interactive Brokers IRA
    Finder Score: 4.5 / 5: ★★★★★
    Interactive Brokers IRA
    $0
    N/A
    Roth, Traditional, SEP, Rollover
    Choose from 6 IRA account options, with access to stocks, ETFs , futures, currencies and more.
    Acorns Later
    Finder Score: 4.2 / 5: ★★★★★
    Acorns Later
    $0
    $3 per month
    Roth, Traditional, SEP
    Automatic ETF investing with as little as $5. Annual fee of $3, $5 or $9 per month depending on subscription.
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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.

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