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
|Where to open
|Brokerage, bank or other financial institution
|Through an employer
|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.
|$7,000 for those under age 50
$8,000 for those age 50 and over
|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
|Earnings grow tax-free
Qualified withdrawals are tax-free
|Contributions reduce your taxable income
Earnings grow tax-free
|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)
|Required by April 1 of the year after the account holder turns 73(3)
|Roth IRAs that contain bank deposits such as certificates of deposit (CDs), savings accounts or money market accounts are insured up to $250,000
|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)
|Learn more about Roth IRAs
|Learn 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.
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
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:
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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.
- “401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000,” Internal Revenue Service, November 1, 2023
- “Retirement topics: Exceptions to tax on early distributions,” Internal Revenue Service
- “Retirement Topics — Required Minimum Distributions (RMDs),” Internal Revenue Service
- “Investor FAQs,” Securities Investor Protection Corporation
- “Retirement Plan and IRA Required Minimum Distributions FAQs,” Internal Revenue Service
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