The core difference: who runs it and when you pay taxes

A Roth IRA is a retirement account you open and manage yourself, usually through a bank or brokerage. You contribute money that has already been taxed, and when you withdraw it in retirement, you pay no tax on the growth. A 401(k) is a retirement plan your employer offers. You contribute money before taxes are taken out, which lowers your taxable income now, but you pay tax on withdrawals later.

The practical difference shows up immediately: with a Roth IRA, you decide how much to put in each year (up to a limit set by the IRS). With a 401(k), your employer sets up the plan and you choose a percentage of your paycheck to contribute. If your employer matches part of your contribution, that money goes into the 401(k) — not into a Roth IRA.

Both accounts let your money grow without being taxed on the gains year to year. The tax treatment of withdrawals is what separates them: Roth withdrawals are tax-free in retirement; 401(k) withdrawals are taxed as ordinary income.

Key Takeaways

  • A Roth IRA uses after-tax money and grows tax-free, while a 401(k) uses pre-tax money and you pay tax on withdrawals later.
  • You open a Roth IRA on your own; a 401(k) is offered by your employer and may include employer matching contributions.
  • Roth IRA contribution limits are lower than 401(k) limits, and Roth IRAs have income restrictions that 401(k)s do not.
  • With a 401(k), you must start taking withdrawals at age 73; with a Roth IRA, you never have to withdraw during your lifetime.
  • If your employer offers a 401(k) match, contributing enough to capture the full match is usually the first step before opening a Roth IRA.

Contribution limits and how much you can put in

For 2024, you can contribute up to $7,000 per year to a Roth IRA if you are under age 50 (or $8,000 if you are 50 or older). These limits change yearly and are set by the IRS. A 401(k) allows much higher contributions — up to $23,500 per year if you are under 50, or $31,000 if you are 50 or older.

The Roth IRA also has income limits. If your income is above a certain threshold, you cannot contribute the full amount or may not be able to contribute at all. For 2024, the phase-out range for single filers starts at $146,000 and ends at $161,000 (these numbers change each year). A 401(k) has no income limits — anyone can contribute regardless of how much they earn.

If you have access to both a 401(k) and a Roth IRA, many people contribute to the 401(k) first to capture any employer match, then open or fund a Roth IRA with additional savings.

Employer matching and assistance programs

Many employers offer a 401(k) match: they contribute money to your account based on how much you contribute. A common match is 50 cents for every dollar you contribute, up to 6 percent of your salary. This is money your employer gives you for free, and it goes directly into your 401(k).

A Roth IRA does not have employer matching because it is not connected to your job. If your employer offers a 401(k) match, you should contribute enough to the 401(k) to receive the full match before putting money into a Roth IRA. Passing up an employer match is passing up immediate, may provide returns on your money.

Tax treatment now versus in retirement

With a 401(k), your contributions reduce your taxable income in the year you make them. If you earn $60,000 and contribute $10,000 to a 401(k), you only pay income tax on $50,000. This lowers your tax bill immediately. When you withdraw money in retirement, each withdrawal is taxed as ordinary income at whatever tax rate applies then.

With a Roth IRA, you contribute money after you have already paid income tax on it. You get no tax deduction now. But when you withdraw money in retirement — including all the growth — you owe no federal income tax. If you expect to be in a higher tax bracket in retirement, or if you think tax rates will be higher in the future, a Roth IRA may save you more money overall.

This is the core trade-off: pay tax now (Roth) or pay tax later (401(k)). Which is better depends on your income, your tax bracket, and what you think tax rates will be when you retire.

Withdrawal rules and access to your money

With a Roth IRA, you can withdraw the money you contributed (not the growth) at any time without penalty or tax. You can only withdraw the growth penalty-free after age 59½ and if the account has been open for at least five years. Before that, withdrawing growth means paying income tax plus a 10 percent penalty.

With a 401(k), you generally cannot withdraw money before age 59½ without paying a 10 percent penalty plus income tax on the withdrawal. Some plans allow loans against your 401(k) balance, which you repay to yourself with interest. A few plans allow "hardship withdrawals" for specific situations like medical bills or eviction, but these are rare and still subject to tax and penalty.

At age 73, you must start taking withdrawals from a 401(k) — the IRS calls these required minimum distributions. With a Roth IRA, you never have to withdraw during your lifetime. This makes a Roth IRA useful if you do not need the money and want to leave it to heirs.

What happens if you change jobs

If you leave your job, your 401(k) stays with you. You can leave it with your former employer, roll it into a new employer's 401(k), or roll it into an IRA (either traditional or Roth, though rolling into a Roth triggers taxes). A Roth IRA is not tied to any employer, so changing jobs does not affect it at all.

Rolling a 401(k) into a Roth IRA converts it to after-tax money, which means you pay income tax on the full amount in the year you roll it over. This can be a large tax bill, so most people only do this if they expect lower income that year or if they are willing to pay the tax for the long-term benefit of tax-free growth.

Which one should you choose

If your employer offers a 401(k) with matching contributions, start there and contribute enough to capture the full match. After that, if you are under the income limits, open a Roth IRA and contribute what you can. The Roth gives you tax-free growth and more flexibility in retirement.

If you are self-employed or your employer does not offer a 401(k), a Roth IRA is a straightforward way to save for retirement. If your income is above the Roth IRA limits, a 401(k) or a traditional IRA may be your only option (though some high-income earners use a "backdoor Roth" strategy, which is more complex).

The best account is the one you will actually fund consistently. Starting early and contributing regularly matters far more than which account you choose.

Frequently Asked Questions

Can I have both a Roth IRA and a 401(k) at the same time?

Yes. You can contribute to both in the same year. However, if you have a traditional IRA or a SEP IRA, there are rules about deducting 401(k) contributions that may affect your taxes. Most people with both accounts contribute to the 401(k) first to capture employer matching, then fund a Roth IRA with additional savings.

What if I withdraw money from my Roth IRA before retirement?

You can withdraw your contributions (the money you put in) anytime without penalty or tax. Withdrawing the growth before age 59½ triggers a 10 percent penalty and income tax, unless you meet a narrow exception like a first-time home purchase (up to $10,000 lifetime) or a may have access to disability.

Do I have to pay taxes on 401(k) employer matching contributions?

No. Employer matching contributions are not taxed when they go into your account. You pay tax on them when you withdraw the money in retirement, along with tax on your own contributions and all the growth.

What is a backdoor Roth, and do I need one?

A backdoor Roth is a strategy where you contribute to a traditional IRA and then convert it to a Roth IRA, allowing high earners to fund a Roth despite income limits. It involves tax calculations and paperwork. You only need this if your income exceeds Roth IRA limits and you want to save more than a 401(k) allows.