A 401(k) and a Roth IRA Are Different Accounts — Here's Why That Matters

A 401(k) and a Roth IRA are not the same thing

A 401(k) is a retirement account your employer sets up and manages. A Roth IRA is an individual retirement account you open and manage yourself. The biggest difference: your employer may match money you put into a 401(k), but nobody matches a Roth IRA. A 401(k) takes money from your paycheck before taxes are calculated. A Roth IRA takes after-tax money, which means you pay taxes now and withdraw tax-free later.

Both accounts let your money grow without being taxed on the gains year to year. But the rules for when you can withdraw, how much you can put in, and what happens to the money are different for each one. You can have both at the same time — many people do.

Key Takeaways

• A 401(k) comes through your employer and uses pre-tax money; a Roth IRA is individual and uses after-tax money.
• Your employer may match part of what you contribute to a 401(k), but there is no match for a Roth IRA.
• A 401(k) has higher contribution limits ($23,500 per year for 2024) than a Roth IRA ($7,000 per year for 2024), but these amounts change annually.
• With a 401(k), you must start taking withdrawals at age 73; with a Roth IRA, you never have to withdraw during your lifetime.
• You can have and contribute to both accounts in the same year if your income and employer plan allow it.

How contributions work: before-tax versus after-tax

When you contribute to a 401(k), the money comes out of your paycheck before your employer calculates your income tax. That lowers your taxable income for the year. If you earn $60,000 and put $10,000 into a 401(k), you only pay income tax on $50,000.

A Roth IRA works the opposite way. You contribute money you have already paid income tax on. You do not get a tax break that year. The trade-off is that when you withdraw the money in retirement, you owe no tax on it — not on what you put in, and not on the growth.

This choice matters most if you think your tax rate will be higher or lower in retirement than it is now. If you expect to earn less in retirement, a 401(k) may save you more money overall. If you expect to earn the same or more, a Roth IRA may be better.

Employer match and contribution limits

Many employers offer to match part of what you put into a 401(k) — often 50 cents or a dollar for every dollar you contribute, up to a certain percentage of your salary. This is assistance programs. A Roth IRA has no employer match because it is not connected to an employer.

The annual contribution limit for a 401(k) is much higher than for a Roth IRA. For 2024, you can put up to $23,500 into a 401(k) and $7,000 into a Roth IRA. These limits change each year. If you are 50 or older, both accounts allow you to contribute extra catch-up amounts.

Because of the employer match, financial advisors often recommend putting enough into your 401(k) to get the full match before putting money into a Roth IRA. The match is an immediate return on your money.

When you can withdraw the money

With a 401(k), you can withdraw money starting at age 59½ without penalty. If you withdraw before that age, you usually owe a 10 percent penalty plus income tax on the amount. Some plans allow loans or hardship withdrawals, but the rules vary by employer.

At age 73, you must start taking withdrawals from a 401(k) — the law requires it. These are called required minimum distributions, or RMDs. You have to withdraw a certain amount each year whether you need the money or not.

A Roth IRA is more flexible. You can withdraw the money you contributed (not the growth) at any time without penalty or tax. You can withdraw growth starting at age 59½ if the account has been open for at least five years. You never have to take withdrawals during your lifetime — you can leave the money there to grow.

Income limits for a Roth IRA

A Roth IRA has income limits. If you earn above a certain amount, you cannot contribute the full $7,000 per year, and above a higher amount, you cannot contribute at all. These limits change each year and depend on whether you file taxes as single or married.

A 401(k) has no income limit. Anyone whose employer offers one can participate, no matter how much they earn. This is one reason high earners often use a 401(k) as their main retirement savings tool.

Can you have both accounts?

Yes. You can contribute to a 401(k) through your employer and a Roth IRA at the same time in the same year. Many people do this to take advantage of the employer match in the 401(k) and the tax-free growth and flexibility of the Roth IRA.

The only limit is the amount of money you have available to save. Contributing to both means setting aside more money each month than you would for one account alone.

Frequently Asked Questions

Can I roll a 401(k) into a Roth IRA?

Yes, but it is complicated. You can convert a 401(k) to a Roth IRA, but you have to pay income tax on the full amount you convert in that year. This is called a Roth conversion. It makes sense only in certain situations, such as a year when your income is unusually low. Talk to a tax professional before doing this.

Which account should I use if my employer does not offer a 401(k)?

A Roth IRA is your main option for tax-advantaged retirement savings. You can also look into a SEP IRA or Solo 401(k) if you are self-employed. A financial advisor can help you figure out which works best for your situation.

What happens to a 401(k) if I leave my job?

You stop contributing, but the money stays in the account and continues to grow. You can leave it there, roll it into your new employer's 401(k), or roll it into an IRA. The rules depend on your plan and your new employer's plan.

Do I pay taxes twice with a Roth IRA — once when I contribute and again when I withdraw?

No. You pay income tax on the money before you put it in the Roth IRA. When you withdraw it in retirement, you owe no tax on it at all — not on contributions and not on growth. That is the whole point of the Roth structure.