A 401(k) is an employer-sponsored retirement plan with high contribution limits and potential employer matching. A Roth IRA is an individual account with lower limits but tax-free growth and more investment flexibility. Most people should use both—the question is which to prioritize.
The short answer: contribute to your 401(k) up to the employer match, then max out a Roth IRA, then return to your 401(k) for additional savings.
Quick Comparison: 401(k) vs Roth IRA
| Feature | 401(k) | Roth IRA |
|---|---|---|
| 2024 Contribution limit | $23,000 | $7,000 |
| Catch-up (age 50+) | +$7,500 | +$1,000 |
| Tax treatment | Pre-tax (Traditional) or after-tax (Roth) | After-tax (contributions), tax-free (withdrawals) |
| Employer match | Yes (if offered) | No |
| Income limits | None for Traditional 401(k) | $161,000-$176,000 (single), $240,000-$256,000 (married) |
| Investment options | Limited to plan offerings | Any stocks, bonds, ETFs, mutual funds |
| Required distributions | Yes, starting at 73 | No (during owner’s lifetime) |
Understanding the 401(k)
How a 401(k) Works
Your employer offers a 401(k) as a benefit. You contribute through payroll deductions, and contributions can be:
- Traditional 401(k): Pre-tax contributions reduce your taxable income now; you pay taxes on withdrawals in retirement
- Roth 401(k): After-tax contributions; withdrawals in retirement are tax-free
401(k) Advantages
High contribution limits: $23,000 per year (2024) plus $7,500 catch-up if over 50. This far exceeds IRA limits.
Employer matching: Many employers match a percentage of your contributions—often 50% or 100% up to a certain amount. This is free money with an immediate 50-100% return.
Payroll deduction: Automatic, effortless pay yourself first savings.
Creditor protection: 401(k) assets are protected from bankruptcy and creditors.
401(k) Disadvantages
Limited investment options: You’re restricted to funds your employer selected—sometimes high-cost options with no low-fee alternatives.
Less control: You can’t choose your account provider or negotiate fees.
Vesting schedules: Employer matches may vest over 3-6 years. Leave early and you might forfeit unvested matching contributions.
Loans and early withdrawal penalties: Accessing funds before 59½ typically incurs 10% penalty plus taxes.
Understanding the Roth IRA
How a Roth IRA Works
A Roth IRA is an individual retirement account you open yourself. Contributions are made with after-tax dollars, but all growth and qualified withdrawals are completely tax-free.
Roth IRA Advantages
Tax-free growth forever: Contributions have already been taxed; neither growth nor withdrawals are taxed.
Investment flexibility: Choose any broker, any investment—index funds, individual stocks, bonds, ETFs.
No required minimum distributions: Unlike Traditional IRAs and 401(k)s, Roth IRAs don’t force withdrawals at 73.
Withdrawal flexibility: Contributions (not earnings) can be withdrawn anytime without penalty.
Tax diversification: Provides tax-free income in retirement, complementing taxable 401(k) withdrawals.
Roth IRA Disadvantages
Lower contribution limits: $7,000/year (2024) limits how much you can shelter.
Income limits: High earners can’t contribute directly (though backdoor Roth is an option).
No employer match: You’re funding it entirely yourself.
After-tax contributions: You don’t get the immediate tax break of Traditional 401(k) contributions.
The Optimal Order for Retirement Contributions
Step 1: 401(k) Up to Employer Match
Contribute enough to get your full employer match. This is non-negotiable—you’re declining free money if you don’t.
Example:
- Salary: $60,000
- Employer matches 50% up to 6% of salary
- Your contribution to get full match: $3,600 (6%)
- Employer match: $1,800 (3%)
- Total: $5,400 (9%)
The match represents an immediate 50% return on your contribution.
Step 2: Max Out Roth IRA
After capturing the full match, contribute to a Roth IRA up to the $7,000 annual limit.
Why Roth before additional 401(k)?
- More investment options (often lower fees)
- Tax-free growth and withdrawals
- No required minimum distributions
- Flexibility to withdraw contributions if needed
Step 3: Return to 401(k)
If you can save more after maxing your Roth IRA, increase 401(k) contributions toward the $23,000 limit.
Step 4: HSA (If Available)
A Health Savings Account offers triple tax advantages. If eligible, this is another powerful savings vehicle.
Step 5: Taxable Brokerage
After maxing tax-advantaged accounts, invest in a regular brokerage account using tax-efficient ETFs or mutual funds.
401(k) vs Roth IRA: When Each Wins
Choose 401(k) When:
You’re in a high tax bracket now. Traditional 401(k) contributions reduce taxable income, providing immediate tax savings at your marginal rate.
Your employer offers generous matching. Always capture the full match—it’s guaranteed return.
You’re over the Roth IRA income limit. High earners can’t contribute to Roth IRAs directly (backdoor Roth is still possible).
You want to save more than $7,000. The higher 401(k) limit allows greater tax-advantaged savings.
Choose Roth IRA When:
You’re in a lower tax bracket now. If you expect higher income in retirement, paying taxes now at lower rates makes sense.
You want investment flexibility. Roth IRA lets you choose any broker and investment.
You’re young with decades of growth ahead. Tax-free compounding over 30-40 years is powerful.
You already get your 401(k) match. After capturing free money, Roth IRA’s tax-free growth often wins.
You want flexibility. Roth contributions can be withdrawn anytime without penalty.
Traditional 401(k) vs Roth 401(k)
Many employers now offer both options. Which to choose?
Choose Traditional 401(k) If:
- You’re in a high tax bracket (32%+)
- You expect lower income in retirement
- You want maximum current tax reduction
- You’re close to retirement
Choose Roth 401(k) If:
- You’re in a lower tax bracket (12-22%)
- You expect higher income in retirement
- Tax rates may increase in the future
- You want tax diversification
- You’re young with decades of growth ahead
Split Contribution Strategy
Many people contribute to both, hedging against uncertain future tax rates. Some employers allow splitting contributions between Traditional and Roth 401(k).
Income Limits and the Backdoor Roth
Roth IRA Income Limits (2024)
| Filing Status | Phase-out Range |
|---|---|
| Single | $146,000 - $161,000 |
| Married Filing Jointly | $230,000 - $240,000 |
Above these limits, direct Roth IRA contributions are prohibited.
The Backdoor Roth Solution
High earners can still access Roth benefits:
- Contribute to a Traditional IRA (non-deductible)
- Convert to Roth IRA (pay taxes on any gains)
- Result: Money now in Roth IRA growing tax-free
The backdoor Roth is legal and widely used, though it involves some complexity and requires careful tax handling.
How Withdrawals Work
401(k) Withdrawals
Traditional 401(k):
- Withdrawals taxed as ordinary income
- 10% penalty before age 59½ (exceptions exist)
- Required Minimum Distributions (RMDs) start at 73
Roth 401(k):
- Qualified withdrawals are tax-free
- Same age 59½ rule
- RMDs required (unlike Roth IRA)—but you can roll to Roth IRA to avoid this
Roth IRA Withdrawals
- Contributions can be withdrawn anytime, tax and penalty-free
- Earnings can be withdrawn tax-free after age 59½ (and 5-year holding period)
- No RMDs during your lifetime
- Penalty exceptions for first home, education, disability
Real-World Scenarios
Scenario 1: New Grad, $45,000 Salary
Situation: Entry-level salary, 22% tax bracket, employer matches 50% of first 6%
Strategy:
- Contribute 6% to 401(k) = $2,700/year → Gets $1,350 match
- Max Roth IRA = $7,000/year
- Total retirement savings = $11,050/year (24.5% savings rate)
Why: Low tax bracket makes Roth attractive. Growth over 40+ years tax-free is valuable.
Scenario 2: Mid-Career, $120,000 Salary
Situation: Comfortable income, 24% tax bracket, employer matches 100% of first 4%
Strategy:
- Contribute 4% to 401(k) = $4,800/year → Gets $4,800 match
- Max Roth IRA = $7,000/year
- Additional 401(k) contribution as budget allows
- Total: $16,600+ per year
Why: Strong match makes 401(k) priority. Roth IRA adds tax diversification.
Scenario 3: High Earner, $200,000 Salary
Situation: High income, 32% tax bracket, over Roth IRA income limits
Strategy:
- Max Traditional 401(k) = $23,000/year (reduces taxable income by $7,360)
- Backdoor Roth IRA = $7,000/year
- HSA if eligible
- Taxable brokerage for additional savings
Why: Traditional 401(k) provides valuable tax reduction at 32% bracket. Backdoor Roth maintains tax-free growth opportunity.
Frequently Asked Questions
Can I have both a 401(k) and Roth IRA?
Yes. Most people should have both. Contribution limits are separate.
Should I contribute to 401(k) if there’s no match?
Usually yes—the tax advantages are still valuable. However, prioritize Roth IRA first for its greater flexibility.
What if my 401(k) has bad investment options?
Contribute enough for the match (free money), then prioritize Roth IRA where you control investments. Return to 401(k) after maxing IRA.
Can I withdraw from my Roth IRA early?
Contributions (not earnings) can be withdrawn anytime without tax or penalty. This flexibility is a Roth advantage.
When should I choose Roth 401(k) over Traditional?
When you’re in a lower tax bracket now than you expect in retirement, or when you want tax diversification.
What happens to my 401(k) if I change jobs?
You can leave it, roll it to new employer’s plan, or roll it to an IRA. Rolling to IRA often provides more investment options.
Key Takeaways
Both 401(k) and Roth IRA are powerful retirement tools:
- 401(k): Higher limits, employer match, immediate tax break (Traditional)
- Roth IRA: Tax-free growth, investment flexibility, no RMDs
- Optimal order: 401(k) to match → Roth IRA → Additional 401(k)
- Most people should use both for tax diversification
- Employer match is free money—never leave it on the table
- Start early to maximize compound interest
Your Next Steps
- Check if your employer offers 401(k) matching—and the formula
- Contribute at least enough to get the full match
- Open a Roth IRA at a low-cost broker (Vanguard, Fidelity, Schwab)
- Choose simple index funds for your investments
- Set up automatic contributions for dollar-cost averaging
- Increase contributions each time you get a raise
- Review and rebalance annually
The best retirement plan is the one you consistently fund. Whether 401(k), Roth IRA, or both, start now and let compound interest work for decades.
Written by Usman Saadat. Fact-checked by Maira Azhar.