Is a Roth 401(k) the Same as a Roth IRA?

Saving for retirement requires careful consideration of investment vehicles. Roth accounts, funded with after-tax contributions, offer tax-free growth and withdrawals in retirement, distinguishing them from traditional pre-tax savings.

Understanding the Roth 401(k)

A Roth 401(k) is an employer-sponsored retirement savings plan allowing after-tax contributions from paychecks. Income taxes are paid on contributions, but qualified withdrawals in retirement are tax-free. In 2025, the maximum employee contribution is $23,500. Individuals aged 50 and older can contribute an additional $7,500, increasing their limit to $31,000. For those aged 60 to 63, a higher catch-up contribution of up to $11,250 is permitted, bringing their total to $34,750.

Employer contributions can also be part of a Roth 401(k) plan. Recent legislation allows employers to offer them on an after-tax (Roth) basis. If designated as Roth, these contributions become taxable income to the employee in the year they are contributed. The combined employee and employer contributions to a 401(k) cannot exceed $70,000 in 2025, or $77,500 for those aged 50 and older.

For Roth 401(k) withdrawals to be qualified and tax-free, two conditions apply. The account owner must be at least 59½ years old, and a five-year waiting period must have passed since the first contribution. If these conditions are not met, withdrawals are non-qualified, meaning the earnings portion may be subject to income tax and a 10% early withdrawal penalty. Contributions, made with after-tax dollars, can be withdrawn tax-free and penalty-free at any time.

Upon leaving an employer, a Roth 401(k) can be rolled over into another employer’s Roth 401(k) plan or a Roth IRA. Rolling over funds to a Roth IRA is advantageous as Roth IRAs do not have required minimum distributions (RMDs), unlike Roth 401(k)s, which are subject to RMDs starting at age 73. When a Roth 401(k) is rolled into a Roth IRA, the five-year clock for qualified distributions transfers.

Understanding the Roth IRA

A Roth IRA is an individual retirement arrangement allowing after-tax contributions, offering tax-free growth and qualified withdrawals in retirement. Unlike a Roth 401(k), it is not tied to an employer and can be opened through a financial institution. The contribution limit for a Roth IRA in 2025 is $7,000 for individuals under age 50. Those aged 50 and older can contribute an additional $1,000, bringing their total annual contribution to $8,000.

Direct Roth IRA contributions are subject to Adjusted Gross Income (AGI) limitations. For 2025, single filers can make a full Roth IRA contribution if their Modified Adjusted Gross Income (MAGI) is less than $150,000. Contributions phase out for single filers with MAGI between $150,000 and $165,000, and are not allowed at or above $165,000. For married couples filing jointly, the full contribution applies if their MAGI is less than $236,000, with a phase-out between $236,000 and $246,000, and no direct contributions at or above $246,000.

Roth IRA withdrawals are qualified and tax-free if the account has been open for at least five years and the account holder is at least 59½ years old. Other qualifying events for tax-free withdrawals include disability or death of the account holder. Additionally, up to $10,000 can be withdrawn tax-free for a first-time home purchase, if the five-year rule is met.

If a withdrawal is non-qualified, the earnings portion may be subject to income tax and a 10% early withdrawal penalty. However, contributions can be withdrawn tax-free and penalty-free, regardless of age or how long the account has been open. The IRS has specific ordering rules for non-qualified Roth IRA withdrawals: contributions are withdrawn first, followed by converted amounts, and then earnings.

Employer contributions are not a feature of Roth IRAs. However, high-income earners exceeding direct contribution limits may use a “backdoor Roth IRA” strategy. This involves making a non-deductible contribution to a traditional IRA and converting those funds to a Roth IRA. There are no income limits on Roth IRA conversions.

Key Differences and Similarities

Roth 401(k)s and Roth IRAs share the benefit of allowing after-tax contributions to grow tax-free, with qualified withdrawals tax-free in retirement. Both require a five-year waiting period for earnings to be tax-free, and permit tax-free withdrawals after age 59½ or in cases of disability or death. Both are tools for retirement planning, particularly for those who anticipate being in a higher tax bracket in retirement.

Roth 401(k)s are employer-sponsored plans, while Roth IRAs are individual accounts opened independently. Contribution limits differ significantly; Roth 401(k)s permit higher employee contributions ($23,500 in 2025, with larger catch-up contributions) compared to Roth IRAs ($7,000 in 2025).

Roth IRAs have Adjusted Gross Income (AGI) phase-out rules for direct contributions. Roth 401(k)s have no income limitations, making them accessible regardless of earnings. Employer contributions are possible with a Roth 401(k), while Roth IRAs do not receive employer contributions.

Investment options can differ, with Roth 401(k) plans offering a limited selection compared to the broader choices available in a Roth IRA. RMDs are another difference. Original owners of Roth IRAs are not subject to RMDs during their lifetime. Roth 401(k)s are subject to RMDs starting at age 73, though these funds can be rolled into a Roth IRA to avoid lifetime RMDs.

Rules for non-qualified early withdrawals also differ. Contributions from both account types can be withdrawn tax-free and penalty-free at any time, but the treatment of earnings differs if the withdrawal is non-qualified. For Roth IRAs, ordering rules dictate that contributions are withdrawn first, then converted amounts, and then earnings. For Roth 401(k)s, non-qualified withdrawals are prorated between contributions and earnings.