Despite both being called “Roth,” Roth IRAs and Roth 401(k)s offer very different pathways to tax-free withdrawals in retirement. Here’s what you need to know about these 2 accounts and how these can help save for retirement.
Similarities and differences between a Roth IRA and Roth 401(k)
Roth 401(k)s and Roth IRAs let you save and invest dollars you've already paid taxes on and potentially make tax-free withdrawals (including any investment earnings) once you're 59½ or older.
With traditional IRAs and 401(k)s, you typically make contributions with pre-tax dollars (or you may be able to deduct your contributions from your taxable income). Then investments can grow tax-deferred, and you may pay income taxes on what you withdraw in retirement.
Roth IRAs have income limits based on your modified adjusted gross income (MAGI)—that’s your federal taxable income with select deductions, like tax-deductible IRA contributions or student loan interest, added back in.
For 2023, single filers earning $153,000 or more and joint filers earning $228,000 or more are not eligible to make a contribution to a Roth IRA. Those who make less than those amounts, but more than $138,000 for single filers and $218,000 for joint filers, may make a partial contribution.
Roth 401(k)s, meanwhile, have no income limits. If your employer offers a Roth option, you can contribute no matter your income up to the greater of the plan's limits or the 401(k) deferral limit. If your employer does not offer a Roth employer retirement plan but you earn too much to contribute to a Roth IRA, you may consider a backdoor Roth IRA, which lets you convert nondeductible traditional IRA contributions into a Roth account.
Contribution limits for Roth IRAs and Roth 401(k)s are very different. You can potentially save much more per year using a Roth 401(k) than a Roth IRA.
Here’s how the contribution limits compare for 2023:
- Roth IRA
- Under age 50: $6,500
- Age 50+: $7,500
- Roth 401(k)
- Under age 50: $22,500
- Age 50+: $30,000
Note: Starting in 2026, the SECURE Act 2.0 will require catch-up contributions to be Roth for those who made more than $145,000 with their current employer in the prior year in accordance with IRS Notice 23-62. Reach out to your employer for more information.
With Roth IRAs, you cannot contribute more than your earned income each year. If you have a Roth 401(k), you cannot contribute more than what you earn at the company that holds your plan.
Withdrawals before retirement
With most retirement accounts, you can’t access the money you contribute or any investment earnings before retirement age without incurring a 10% early withdrawal penalty, plus any applicable income taxes.
One appealing trait of Roth IRAs is that you can access your contributions before retirement without penalty. If you want to withdraw investment earnings without tax or penalty before age 59½, you’ll need to have first contributed to your account at least 5 years prior and meet one of the approved exceptions.1 Otherwise, you may be on the hook for the standard 10% early withdrawal penalty plus any applicable income taxes on previously untaxed dollars (i.e., your investment earnings).
With a Roth 401(k), the rules get a bit more complicated. For a Roth 401(k), you may be able to avoid early withdrawal penalties2 if the withdrawals qualify as a hardship withdrawal.1 If your plan allows you to make a non-hardship early withdrawal from your Roth 401(k), you'll likely need to make a "prorata" withdrawal that combines contributions and earnings and represents a proportion of earnings each contributed dollar has made. This means you’d have to make a withdrawal that includes your previously untaxed earnings, which might be taxed or penalized, depending on the situation for your withdrawal.
While that makes early Roth 401(k) withdrawals more complicated, the Roth 401(k) does hold a unique advantage over the Roth IRA for early withdrawals. If you part ways with the company sponsoring your Roth 401(k) after you turn 55, you can access its contents for an early withdrawal penalty-free. You can also avoid taxes, if you first contributed to a Roth account at least 5 years before. Keep in mind that early withdrawals made from any type of retirement account miss out from potential future investment earnings.
Withdrawals during retirement
You may have to pay income taxes on the earnings you take out before you've reached the 5-year mark, much like you would if you made a nonqualified early withdrawal. However, you will not have to pay a 10% early withdrawal penalty on any earnings withdrawn after age 59½.
If you meet the income guidelines, you can open a Roth IRA at a financial institution, such as Fidelity. On the other hand, you can only save through a Roth 401(k) if your employer offers this type of plan. If you’re self-employed, it’s possible to open a small-business retirement plan, like a solo 401(k), to access Roth-related benefits.
Employer contributions and matches
With employer-sponsored retirement plans, like Roth 401(k)s, your company may make contributions on your behalf. These may take the form of outright contributions or profit sharing, which don’t require you to contribute anything, or they may be what are known as matching contributions, which require you to contribute a certain amount yourself that your employer then matches as a preset percentage or amount.
It's important to note that currently employer contributions and matches can only be made to pre-tax accounts. So if you are contributing to a Roth 401(k), your employer would have to make its matching contribution on a pre-tax basis. Once the contributions are fully vested and if your plan allows, you could move them to a Roth account later, though you might have to pay income taxes on the amount rolled over.
With the SECURE Act 2.0, this is scheduled to change in 2024, when employees may elect for these matching or profit sharing contributions to be made into a Roth account, if the plan allows.
Only you can contribute to a Roth IRA. You may find a wider range of investment options when you invest with a Roth IRA over a Roth 401(k).
With a Roth 401(k), you’re limited to the investments your employer chooses to include in its plan's investment lineup. But because you can open a Roth IRA at a wide range of financial institutions and roboadvisors, you can choose one that offers what you prefer to invest in.
While not all employers offer the option, your Roth 401(k) could give you the ability to borrow from your account through a 401(k) loan. If this option is available, you could borrow up to 50% of your balance up to $50,000. In most cases, if you don't pay the loan back within 5 years or you are unable to repay within a preset amount of time when you leave your company, your loan counts as a withdrawal and could be subject to taxes and penalties.
Roth IRAs do not offer a similar feature, though you do have the option of withdrawing contributions tax-free at any time. Keep in mind that withdrawing from a Roth IRA or Roth 401(k), even through a loan, may cause you to miss out on short-term investment growth.
Required minimum distributions (RMDs)
Almost all retirement accounts are subject to forced distributions called required minimum distributions, or RMDs. These kick in when you turn 73 or stop working at the job offering the plan, whichever comes later, and they must be withdrawn, whether you need the money or not. Otherwise, you may owe a tax penalty equal to 25% of the amount you were supposed to have withdrawn.
Roth IRAs are not subject to RMDs, and starting in 2024, the same will apply to Roth 401(k)s. This could make Roth accounts more popular in estate planning, as they could benefit from potential compound growth by remaining undisturbed for a longer period and can be inherited without requiring the beneficiary to pay taxes on withdrawals. Note: If you have reached 73 or stopped working at the job offering your Roth 401(k) in 2023, you will still need to take an RMD for that year.
Can you have a Roth 401(k) and Roth IRA?
Yes. If you have a Roth 401(k) at work and you meet the income requirements to contribute to a Roth IRA, you can contribute to both. How you plan contributions to each depends on your financial goals. Be sure to consider the benefits and limitations of each type of account, detailed above, when deciding how much to save in each.