Roth IRA or 401k: Which Retirement Plan to Choose?

The decision between retirement plans shapes how your savings grow and how you access them in the future. This choice impacts your current finances through tax deductions and your long-term wealth through different tax treatments in retirement. Making an informed decision requires understanding how each account functions to align your choice with your personal financial situation and goals.

Understanding the 401(k) Plan

A 401(k) is an employer-sponsored retirement plan allowing workers to invest a piece of their paycheck before taxes are taken out. These pre-tax contributions reduce your total taxable income for the year. For example, if you earn $60,000 and contribute $5,000 to your 401(k), you will only pay income tax on $55,000 for that year.

The funds in a 401(k) grow tax-deferred, meaning you do not pay taxes on investment gains each year. Taxation occurs when you withdraw the money in retirement.

An advantage of 401(k) plans is the potential for an employer match. Many companies contribute to your account by matching a percentage of your contributions, such as a dollar-for-dollar match up to 3% of your salary. This employer contribution represents an immediate return on your investment.

Some employers also offer a Roth 401(k) option, where contributions are made with after-tax dollars. This means you do not get an upfront tax deduction, but qualified withdrawals in retirement are tax-free. Any matching funds from your employer are made on a pre-tax basis and deposited into a separate, traditional 401(k) account.

Understanding the Roth IRA

A Roth Individual Retirement Arrangement (IRA) is a personal retirement account that you open on your own. Contributions are made with post-tax dollars, meaning you have already paid income tax on the money you put in. As a result, you do not receive a tax deduction in the year you contribute.

The benefit of this structure is that qualified withdrawals of your contributions and their investment earnings are completely tax-free in retirement. The money also grows tax-free within the account. This can be advantageous for those who expect to be in a higher tax bracket during retirement.

Because a Roth IRA is not tied to employment, it is controlled by you and can be opened at most financial institutions if you have earned income. This provides a wider array of investment choices than those offered in an employer’s 401(k) plan.

The IRS sets Modified Adjusted Gross Income (MAGI) thresholds that can reduce or eliminate your ability to contribute to a Roth IRA. For 2025, the ability to contribute phases out for single filers with a MAGI between $149,000 and $165,000, and for married couples filing jointly with a MAGI between $221,000 and $246,000.

Core Differences in Contributions and Growth

A significant difference between the accounts is the annual contribution limit. For 2025, an employee can contribute up to $23,500 to their 401(k). In contrast, the contribution limit for a Roth IRA in 2025 is $7,000.

Both account types allow for catch-up contributions for individuals age 50 and over. For a 401(k), this additional amount is $7,500 in 2025, bringing the total possible contribution to $31,000. The IRA catch-up is $1,000, for a total of $8,000. A provision starting in 2025 allows those aged 60 to 63 to make a larger catch-up contribution to their 401(k) if their employer allows it.

The accounts also differ in other important ways. A 401(k) may come with an employer match and has no income restrictions for contributing. However, a Roth IRA offers the investor far greater control and a broader universe of investment choices, including individual stocks, bonds, and ETFs.

Comparing Withdrawal Rules and Taxation

The tax treatment of qualified distributions, which are those taken after age 59½ from an account open for at least five years, differs greatly. For a traditional 401(k), every dollar you withdraw is treated as ordinary income and is subject to income tax. In stark contrast, qualified withdrawals from a Roth IRA are entirely tax-free.

Another difference involves Required Minimum Distributions (RMDs). The IRS requires you to begin taking withdrawals from traditional 401(k)s once you reach age 73, and failing to do so results in a penalty. Roth IRAs and Roth 401(k)s are not subject to RMDs for the original account owner, allowing the money to continue growing tax-free for your entire lifetime.

For early withdrawals before age 59½, both account types impose a 10% penalty on the taxable portion of the withdrawal, plus income taxes. The Roth IRA has a flexible feature, however. You can withdraw your direct contributions, but not the earnings, at any time for any reason, tax-free and penalty-free.

Making the Decision for Your Situation

Your first consideration should be your employer’s 401(k) match. If your employer offers one, it is advisable to contribute at least enough to your 401(k) to capture the full match, as this is an immediate, guaranteed return on your investment.

Your current and anticipated future tax bracket is a factor. If you expect your income and tax rate to be higher in the future, a Roth account may be more beneficial. Conversely, if you are at your peak earning years and expect to be in a lower tax bracket in retirement, the tax deduction from a traditional 401(k) could be more valuable.

Your income level may also influence the choice, as the ability to contribute directly to a Roth IRA is phased out at higher income levels. If your income exceeds the MAGI limits, a 401(k) or a traditional IRA becomes your primary option.

You do not have to choose only one account. A common strategy is to contribute enough to your 401(k) to get the full employer match, then direct additional savings into a Roth IRA until you reach its contribution limit. This approach allows you to benefit from the employer match while also building a source of tax-free income for retirement.