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Roth 401(k) vs. Roth IRA: Key Differences


Roth IRAs and Roth 401(k)s are retirement savings vehicles that can protect your earnings from Uncle Sam when you withdraw your money in retirement. But one may be better for you depending on your needs. We’ll explain the pros and cons of each to help you decide which plan is right for you. If you want further hands-on advice, consider finding a professional by using SmartAsset’s free financial advisor matching tool.

Should I Open a Roth IRA or Roth 401(k)?

If you don’t have access to a Roth 401(k), the answer is easy. Roth 401(k)s are employer-sponsored accounts. And not every company that offers a traditional 401(k) also provides its Roth component.

But if you have access to both, it’s important to take a look at the nuts and bolts of each. They have different income requirements, contribution limits and rules. So let’s start with the basics to see if you find them attractive in the first place.

Roth 401(k) vs. Roth IRA: What Are They?

You fund Roth IRAs and Roth 401(k)s with after-tax dollars. This means they’re funded with money that comes out of your paycheck after taxes have been collected. So you get no tax-break upfront as you would with a traditional 401(k) or IRA.

Your contributions are not tax-deductible for either a Roth 401(k) or a Roth IRA. But contributions toward a Roth 401(k) or Roth IRA will grow tax-free. The major trade off, however, is that you get to make tax-free withdrawals when you reach age 59.5 – as long as you’ve held either account for at least five years.

Roth 401(k) vs. Roth IRA: Income Requirements

Eyeing the Roth IRA? Be sure to note that Roth IRAs have income requirements that determine who is eligible to open an account.

As of 2024, you can invest in a Roth IRA if you’re a single tax filer as long as your modified adjusted gross income (MAGI) doesn’t exceed $161,000. The Roth IRA income limit for married couples filing jointly is $240,000. However, it’s important to note these rules determine who is allowed to open a Roth IRA in the first place. It doesn’t mean that anyone who is eligible to invest in one can make the maximum contribution, which is $7,000 in 2024.

There are “phase-out” points depending on your income level. In other words, your actual contribution limits begin to decrease from this maximum as your income goes up, before you can’t invest in a Roth IRA at all.

A single tax filer can’t make the maximum contribution once his or her MAGI passes $146,000. For married couples filing jointly, that phase-out begins at $230,000. Once you pass these thresholds, your limits decrease.

It’s a little easier to get into a Roth 401(k), however. Anyone with access to one can contribute toward it regardless of income.

Roth 401(k) vs. Roth IRA: Contribution Limits

Here’s where the Roth 401(k) takes a landslide victory. The maximum contribution for a Roth 401(k) is $23,000 for 2024. Those who are at least 50 years old can contribute up to $30,500.

The contribution limit for a Roth IRA stands at a smaller $7,000. Those aged 50 or better can contribute up to $8,000.

Roth 401(k) vs. Roth IRA: Investment Options

roth 401(k) vs roth ira

When it comes to the Roth 401(k), you’re limited to whatever is in the investment menu your employer offers. Often, this includes a number of target-date funds and other types of mutual funds.

However, Roth IRAs virtually give you access to the entire securities market. You can select from a number of stocks, bonds and mutual funds to build an investment portfolio.

Or you can find a financial advisor to help you build one based on your own investment goals and risk tolerance. SmartAsset’s asset allocation calculator can give you a good glimpse of what a diversified investment portfolio may look like based on how conservative or aggressive you are with investments.

Roth 401(k) vs. Roth IRA: Company Match

If you’re lucky, your employer may provide a company match on your Roth 401(k). Basically, your employer contributes as much as you do to your own plan each year, up to a certain percentage limit. This can sometimes go up to 6%, and it’s essentially free money. Because Roth IRAs are not employer-sponsored, you won’t find that perk when you invest in one.

However, there is a catch to the employer match in a Roth 401(k). The money your employer puts in doesn’t get the after-tax treatment as described above. Instead, it gets put into a traditional IRA in your name. This means you won’t get to make eligible withdrawals on the earnings of this portion. But they are tax-deductible. So it’s important to understand traditional 401(k)s if you’re getting a company match on your Roth 401(k).

Roth 401(k) vs. Roth IRA: Required Minimum Distributions

As a Roth 401(k) account holder, you must begin taking withdrawals or required minimum distributions (RMDs) at age 73 (up from 72, as of 2023).

You can essentially contribute to your Roth IRA for your entire life. And other than your spouse, anyone else who inherits your IRA must begin taking RMDs depending on their relation to you. So it’s also important to understand RMD rules.

Roth 401(k) Vs. Roth IRA: Can I Have Both?

Yes. No rule states you can’t open a Roth 401(k) along with a Roth IRA. High rollers may want to open both to take advantage of both contribution maximums. But if you can’t do that, you may want to max out your Roth 401(k) first in order to take maximum advantage of an employer match if available.

You can then open a Roth IRA, which gives you far more fund options.

Bottom Line

Roth 401(k) vs Roth IRA: Which Plan is Best?

Before you begin comparing Roth 401(k)s and Roth IRAs, make sure you have access to both. Not all employers offer Roth 401(k)s, and Roth IRAs have income limits. Generally speaking, you can’t invest in one if you’re a high income earner. But if you have access to both, start asking yourself some questions.

Can you contribute more than $7,000 in 2024? Roth 401(k) may be better since it has higher contribution limits. Do you prefer access to funds managed for you, or are you more of a hands-on investor? If so, a Roth IRA may be the better option here. But be sure to eye fees for any investments you make. Nonetheless, take a close look at your personal preferences, financial situation and goals. Then, the answer becomes clear. Of course, you can invest in both a Roth 401(k) and Roth IRA if it’s doable for you.

Tips on Retirement Savings 

  • Saving for retirement can be a complex process, but a financial advisor can help you organize your plans. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If neither the Roth 401(k) or the Roth IRA appeal to you, there are plenty more retirement savings options out there. Consider a traditional 401(k) or traditional IRA. Try using SmartAsset’s 401(k) calculator to see how much you can save.