Roth 401(k) vs. Roth IRA: What’s the Difference?

The “Roth” designation in a retirement account signifies a specific tax treatment. Unlike traditional accounts funded with pre-tax money, Roth accounts are funded with after-tax dollars, meaning you do not receive an immediate tax deduction. The primary benefit is that your investments grow tax-free, and qualified withdrawals during retirement are also tax-free.

This tax structure is available through the Roth 401(k) and the Roth IRA. The Roth 401(k) is an option within an employer-sponsored retirement plan, so its availability depends on your employer. In contrast, the Roth IRA is an individual retirement account you can open on your own, provided you meet certain income requirements. While both share the Roth principle of tax-free withdrawals, they differ in their operational rules.

Contribution Rules and Limits

A primary distinction between Roth 401(k)s and Roth IRAs is how much you can save each year. For 2025, the employee contribution limit for a 401(k), including Roth 401(k)s, is $23,500. This is substantially higher than the limit for IRAs, which is $7,000 for 2025.

Both account types offer catch-up provisions. For a 401(k), individuals age 50 and over can contribute an additional $7,500. As of 2025, the SECURE 2.0 Act allows for a higher catch-up of $11,250 for those ages 60 through 63. For a Roth IRA, the catch-up contribution for those 50 and older is $1,000.

Eligibility to contribute directly to a Roth IRA is restricted by your Modified Adjusted Gross Income (MAGI). For 2025, the ability to contribute is phased out for single filers with a MAGI between $150,000 and $165,000, and for joint filers between $236,000 and $246,000. In contrast, the Roth 401(k) has no income limitations, so you can contribute if your employer offers it.

Another difference involves employer contributions. Many employers offer a matching contribution for 401(k) plans. Traditionally, these matching funds were made on a pre-tax basis into a traditional 401(k) account. However, employers can now offer the choice to receive matching contributions on a post-tax (Roth) basis. If an employee elects this option, the match is taxable in the year it is made but can be withdrawn tax-free in retirement. Roth IRAs do not have an employer match feature.

Investment Options and Account Fees

The range of available investments is a point of divergence. A Roth 401(k) is part of an employer’s plan, and the investment menu is curated by the plan administrator. This results in a limited selection, often consisting of mutual funds, target-date funds, and the company’s stock.

A Roth IRA offers a much broader universe of investment possibilities. When you open a Roth IRA at a brokerage firm, you gain access to nearly any publicly traded security, including:

• Individual stocks
• Bonds
• Exchange-traded funds (ETFs)
• Mutual funds from various fund families

The fee structures for these accounts also differ. Roth 401(k) fees can be less transparent and may include plan administration fees, recordkeeping fees, and individual service fees. These costs are determined by the agreement between your employer and the plan provider.

Fees for a Roth IRA are generally more direct. They often include an annual account maintenance fee, which many brokerages waive if your account balance exceeds a certain threshold. Other costs are tied to your investment activity, such as trading commissions and the internal expense ratios of the funds you own.

Withdrawal and Distribution Regulations

For a withdrawal to be a “qualified distribution” from either account, it must meet two conditions. First, you must satisfy the 5-year rule. Second, you must be at least age 59½, become disabled, or the distribution must be made to your beneficiary after your death.

The 5-year rule clock starts on January 1 of the first year you contribute to any Roth IRA. For a Roth 401(k), the clock starts on January 1 of the first year you contribute to that specific employer’s plan. This means a new 5-year clock begins if you change jobs and contribute to a new Roth 401(k).

A historical difference between the accounts involved Required Minimum Distributions (RMDs). The SECURE 2.0 Act eliminated RMDs for Roth 401(k)s for the original account owner, aligning them with Roth IRAs. This allows funds in both account types to grow tax-free for the owner’s lifetime.

Roth IRAs offer flexibility for early withdrawals. You can withdraw your direct contributions at any time, for any reason, without paying taxes or penalties. This rule does not apply to investment earnings. Roth 401(k)s are more restrictive, as early withdrawals are subject to plan rules and may trigger taxes and penalties. Additionally, many 401(k) plans permit loans, a feature not available with an IRA.

Rollover and Conversion Strategies

A direct rollover from a Roth 401(k) to a Roth IRA is a common strategy when changing jobs. This allows you to consolidate retirement assets and escape the potentially high fees or limited investment options of a former employer’s plan. A rollover preserves the tax-free nature of the funds while providing access to the wider investment selection of an IRA.

For high-income earners prevented from contributing to a Roth IRA due to MAGI limitations, a “backdoor” Roth IRA strategy exists. This process involves making a non-deductible contribution to a Traditional IRA and then converting those funds into a Roth IRA. The conversion is a taxable event on any growth that occurred.

A “mega backdoor” Roth IRA strategy is available if your 401(k) plan permits after-tax, non-Roth contributions. This is a separate contribution category from regular deferrals. This rule allows you to contribute additional funds up to the overall IRS limit ($70,000 for 2025). You can then convert these after-tax contributions into the Roth portion of your 401(k) or roll them to a Roth IRA.