Roth IRA or 401k: Which Should You Fund First?

Deciding where to first invest your retirement savings is a major financial choice between a workplace 401(k) and a Roth Individual Retirement Arrangement (IRA). The optimal path depends on your financial situation, your employer’s offerings, and your long-term goals. Understanding the mechanics of each account is the first step toward a sound retirement strategy.

The choice you make can have long-lasting implications on the money you have in retirement and the taxes you will pay on it. This guide examines the most important factors, from employer incentives to tax implications.

The Importance of the 401(k) Employer Match

The primary reason to prioritize a 401(k) is the employer match. Many companies match a percentage of your contributions, which is an immediate, guaranteed return on your investment. Failing to contribute enough to receive the full match is like turning down a portion of your compensation package.

Employer matching formulas vary, but a common structure is a 100% match on the first 3% to 6% of your salary that you contribute. For example, if you earn $60,000 per year and your employer offers a 100% match on the first 3% of your salary, they will contribute $1,800 to your 401(k) if you contribute at least $1,800 yourself. This instantly doubles your initial investment.

This matching contribution should be your first savings priority. Before considering a Roth IRA, your goal should be to contribute enough to your 401(k) to capture the entire employer match, as its impact compounds over time.

Key Differences Between a 401(k) and a Roth IRA

Tax Treatment

The main difference between a traditional 401(k) and a Roth IRA is how they are taxed. Contributions to a traditional 401(k) are made with pre-tax dollars, reducing your current taxable income. Your investments grow tax-deferred, and you pay income taxes on withdrawals in retirement. In contrast, a Roth IRA is funded with post-tax dollars, so contributions do not lower your current taxable income. The benefit is that your investments grow tax-free, and qualified withdrawals in retirement are also tax-free. Some employers also offer a Roth 401(k) option, which combines the post-tax feature of a Roth IRA with the structure of a 401(k).

Contribution Limits

The Internal Revenue Service (IRS) sets separate annual limits for how much you can contribute to these accounts. For 2025, you can contribute up to $23,500 to a 401(k). If you are age 50 or over, you can also make a catch-up contribution of $7,500, for a total of $31,000. Participants aged 60, 61, 62, and 63 can make a higher catch-up contribution of $11,250, bringing their potential total to $34,750.

The contribution limit for a Roth IRA is lower. In 2025, the maximum you can contribute is $7,000. The catch-up contribution for those age 50 and over is $1,000, bringing the total possible contribution to $8,000. It is possible to contribute to both a 401(k) and a Roth IRA in the same year.

Income Eligibility Rules

While anyone with earned income can contribute to a traditional 401(k), direct contributions to a Roth IRA are restricted by your Modified Adjusted Gross Income (MAGI). For 2025, the ability to contribute to a Roth IRA begins to phase out for single filers with a MAGI between $150,000 and $165,000. For those who are married and filing jointly, the phase-out range is between $236,000 and $246,000. If your income exceeds these upper limits, you cannot contribute directly to a Roth IRA.

Investment Options

A 401(k) plan offers a limited menu of investment options, usually a list of mutual funds and target-date funds selected by your employer. While this simplifies the decision-making process, it can be restrictive for those who want more control.

A self-directed Roth IRA offers a much broader universe of investment possibilities. Through a brokerage firm, you can invest in individual stocks, bonds, exchange-traded funds (ETFs), and mutual funds, allowing for greater customization of your investment strategy.

Withdrawal Rules

Roth IRAs offer greater flexibility for accessing your money before retirement. You can withdraw your direct contributions from a Roth IRA at any time, for any reason, without tax or penalty because you have already paid taxes on that money.

Withdrawing from a 401(k) before age 59½ is more restrictive. Early withdrawals are subject to both ordinary income tax and a 10% penalty, although there are exceptions for hardships like disability or certain medical expenses.

How Personal Factors Guide Your Decision

Your decision should be guided by comparing your current income tax rate to the rate you expect in retirement. If you anticipate being in a higher tax bracket during your retirement years, a Roth IRA is advantageous, as it allows you to pay taxes now at your current, lower rate. Conversely, if you expect your tax bracket to be lower in retirement, a traditional 401(k) may be the better choice, as it defers taxes until your lower-income years.

Your income level impacts your eligibility for a Roth IRA. If your MAGI exceeds the annual limits, you are prohibited from making direct contributions, making your workplace 401(k) the primary option. High-income earners may still fund a Roth account through a “backdoor” Roth IRA, but the 401(k) is the most direct choice.

The control you desire over your investments also plays a role. If you want to build a customized portfolio of specific stocks or ETFs, the flexibility of a self-directed Roth IRA may be more appealing than the limited menu of a 401(k).

The availability of a Roth 401(k) at your workplace can alter your decision. This option allows you to make post-tax contributions up to the higher 401(k) limit and is not subject to the income restrictions of a Roth IRA. It combines the tax-free growth of a Roth with the high contribution limits and potential employer match of a 401(k).

A Prioritized Strategy for Contributions

The first priority is to contribute to your 401(k) up to the amount needed to receive the full employer match. This step provides an immediate return on your investment that should not be overlooked.

After securing the full employer match, direct your savings to a Roth IRA until you reach the annual contribution limit. This builds a source of tax-free income for retirement and provides tax diversification. Having both pre-tax and post-tax funds gives you flexibility in managing your taxable income during retirement.

If you have maxed out your Roth IRA contributions and can save more, return to your 401(k). Continue contributing until you reach the annual maximum limit to take full advantage of available tax-advantaged accounts.

This strategy has variations. If your employer does not offer a match, your decision should be based on your current versus expected future income. If your income is too high to contribute to a Roth IRA, your focus should be on maximizing your 401(k) contributions, considering a traditional or Roth 401(k) if available.