While sketching out your retirement planning roadmap, you’ll likely encounter 2 popular ways to save and invest: the Roth IRA and the 401(k). Both types of retirement accounts offer tax advantages as a primary benefit, but there are important differences. Here are some of the similarities and differences between the 2 account types.
What is a Roth IRA?
A Roth IRA is a type of individual retirement account that allows eligible contributors to invest money they’ve already paid taxes on. The account allows withdrawals of your contributions at any time without taxes or penalties; withdrawals of both contributions and earnings are tax-free after age 59½ and once the Roth IRA 5-year rule has been met. You could invest in a range of investment options, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Unlike a 401(k), a Roth IRA is self-funded and self-managed, meaning individuals can set up the account independent of an employer.
Advantages of Roth IRAs
Roth IRAs have many benefits that can attract retirement savers:
- A Roth IRA allows your money to grow tax-free, with tax-free withdrawals in retirement (if certain requirements are met).1
- Even before retirement, you could withdraw your contributions from your Roth IRA—but not investment earnings—without paying a penalty.
- You can contribute to your Roth IRA as long as your earnings are below the income limits, be it as a contractor or full-time employee. There are no age limits for contributing.
- There are no required minimum distributions or RMDs, an amount you’re obligated to take out of certain tax-advantaged accounts each year after you reach a certain age.
Disadvantages of Roth IRAs
It’s wise to consider these potential downsides to Roth IRAs:
- Since Roth IRA contributions are made after taxes, account holders don’t get an upfront tax break.
- If you withdraw investment earnings before age 59½, you’ll generally pay income taxes plus an additional 10% penalty.
- IRAs have a comparatively low annual contribution limit. IRA contribution limits in 2025 are capped at $7,000 if you’re under age 50 and $8,000 for those age 50 and older.
- Roth IRA income limits mean some higher earners may not be able to contribute. For 2025, you can make full contributions to your Roth IRA if your modified adjusted gross income (MAGI) is less than $150,000 for a single adult and $236,000 if married and filing jointly.
- Unlike many 401(k) plans, Roth IRAs are set up individually and don’t offer employer matching contributions.
What is a 401(k)?
A 401(k) allows you to put some of each paycheck into a retirement account. Contributions to traditional 401(k)s are usually made before paying taxes, with some employers matching a portion of the money you stash away for retirement. You could invest your dollars in employer-selected options, most often including index funds and target date funds. Since money in a traditional 401(k) is contributed pre-tax, you pay taxes on withdrawals in retirement, but the money grows tax-deferred while it stays in the account.
There’s also something called a Roth 401(k), which is a kind of hybrid between a Roth IRA and a 401(k), with some rules from each kind of plan.
Advantages of 401(k) plans
Traditional 401(k) plans offer several benefits:
- Contributions are automatically deducted from your paycheck, without the need to manually transfer money.
- Contributions reduce your taxable income for that year.
- Your investments could grow tax-deferred until it’s time to withdraw funds.
- Some employers offer 401(k) matching, contributing additional dollars to your retirement account.
- The annual contribution limit for a 401(k) is comparatively high, giving you more opportunity to save in a tax-advantaged way. In 2025, you can contribute up to $23,500 pre-tax to your 401(k). If you’re at least age 50 at the end of the calendar year, you may be able to add additional contributions of up to $7,500 (or $11,250 if age 60–63), if your plan allows.
Disadvantages of 401(k) plans
Keep these considerations in mind before investing in a traditional 401(k):
- The plan may have more limited options for investments compared to other retirement accounts.
- If you withdraw from your 401(k) before age 59½, you may have to pay a 10% penalty, along with income taxes on the amount you withdraw.
- In the event of an immediate and heavy financial need, taxes and penalties may still apply to a hardship 401(k) withdrawal.
- You generally need to start taking RMDs from your 401(k) account the year you turn age 73. RMDs could increase taxable income in retirement.
Similarities between Roth IRAs and 401(k)s
Because they’re both retirement accounts, these 2 accounts have some common features:
- Both Roth IRAs and 401(k)s encourage long-term investing to help maximize your retirement funds.
- Each account allows for a diversified portfolio that spreads risk across different investments.
- Each offers tax advantages.
- Both accounts allow those age 50 and older to make catch-up contributions beyond the general annual limit, if your plan allows.
Differences between Roth IRAs and 401(k)s
There are several ways these 2 accounts aren’t alike:
- The annual contribution limit for a 401(k) is much higher than what you can contribute to a Roth IRA.
- Unlike a 401(k), a Roth IRA has an income cap, making some higher earners ineligible to contribute.
- Contributions to a traditional 401(k) reduce taxable income; contributions to a Roth IRA don’t.
- Roth IRAs allow you to withdraw your contributions at any time tax- and penalty-free, while 401(k)s generally impose taxes and a 10% penalty on early withdrawals.
- Since the employer offers 401(k) plans, the account also allows for employer contributions, whereas a Roth IRA is funded only by the account holder.
- Roth IRAs provide tax-free withdrawals in retirement if qualified,1 while traditional 401(k)s offer tax-deferred growth with taxes on withdrawals.
- Some 401(k) plans may allow savers age 60–63 to contribute even more than savers age 50–59 and 64 and over.
Is a 401(k) an IRA?
No, a 401(k) is not an IRA. IRAs and workplace plans, like 401(k)s, are distinct types of retirement accounts with different structures, contribution limits, and tax rules. An IRA allows individuals to contribute and manage their investments independently, while typically an employer sponsors a 401(k), with a more limited set of investment choices.
Roth IRA vs 401(k): How to choose
It’s possible to be eligible to contribute to both a Roth IRA and a 401(k) and to make contributions to each at the same time. If you’re deciding which to fund first, consider prioritizing contributions to your 401(k) to capture the full employer match, if offered. Once you’re getting the maximum employer match, you could contribute to a Roth IRA to benefit from tax-free withdrawals in retirement.
Can you have a Roth IRA and a 401(k)?
Yes, you can have both a Roth IRA and a 401(k). If you’re eligible to contribute to both a Roth IRA and a 401(k), the annual contribution limits are separate from each other—you may contribute up to the maximum for each account type.
Am I eligible to contribute to a Roth IRA?
Your eligibility to contribute to a Roth IRA depends on your annual income. Even if your income is too high to contribute the annual maximum, you may be able to make a partial contribution. Single tax filers with a MAGI of at least $150,000 but less than $165,000 may contribute. So may joint filers with a MAGI of at least $236,000 but less than $246,000. Calculate how much you’re eligible to contribute.
If you earn more than these limits, you still have options for getting tax-free withdrawals. You might consider a Roth 401(k) if available from your employer because it doesn’t have income restrictions. Or you could consider a backdoor Roth IRA, a strategy of converting nondeductible contributions in a traditional IRA to a Roth IRA. It may not make sense for everyone, particularly those who have large amounts of traditional IRA contributions that have already been deducted from their taxes. If you’re evaluating the strategy, it’s always a good idea to consult with a tax professional to discuss the timing, the potential tax impact, and the process.
How to invest through a 401(k)
To invest through a 401(k), follow these directions.
1. Enroll in your employer’s 401(k) plan
If you’re not automatically signed up, you can do it yourself through your employer’s online portal or by asking for guidance from the human resources department.
2. Decide how much to contribute
Once you’re enrolled, specify what percentage of your paycheck you’d like automatically deducted and contributed toward your 401(k). Your contributions may then be invested in a default fund, such as a target date fund that offers a mix of stocks and bonds that gradually adjusts to be more conservative as your goal date approaches.
Related: What is a target date fund?
3. Choose your investments
Most plans offer a variety of investments, and it’s wise to look through options before picking. You may decide the default fund is right for you and keep directing your contributions there. Or you may decide to put a little or none there.
4. Check in on your investments
At least once a year, review your portfolio. Consider selling investments and buying new ones to keep your investment mix aligned with your goals. You also may have access to professional management through the firm that houses your account, which you could consider taking advantage of if you’d like additional guidance. Just be aware of any fees they may charge.
How to invest through a Roth IRA
Take these steps if you’d like to set up a Roth IRA.
1. Choose a financial institution that offers the account and open it
Compare a few different options. Look into the fees they charge, minimum investments they mandate, and tools they offer. Ask yourself these 5 questions before you choose a broker. Once you’ve chosen a broker, submit the required information to open the account.
2. Fund the account
You can contribute up to the annual limit through anything from a bank transfer to a check deposit, depending on your provider. You may also transfer assets from an existing IRA at a different provider, but keep in mind that this does not count toward the annual contribution limit.
3. Choose your investments
Unlike a 401(k), you’ll need to actively pick investments on your own, since there are no default options.
4. Check in on your investments
Reassess them at least annually to check they’re still in line with your financial goals and timeframe.