Roth 401(k) vs. Roth IRA: A Comparison

If you've opened a Roth IRA on your own and have access to a Roth 401(k) at work, you might be curious about the differences beyond annual contribution limits.

Here's what you need to know and how to incorporate each account into your retirement planning.

Roth 401(k) vs. Roth IRA: Overview

Put simply, Roth 401(k)s and Roth IRAs have the same tax advantages: You put in after-tax dollars, the money grows tax-free, and then in retirement, you can make qualified withdrawals tax-free. Below, we'll cover some of the differences between the two accounts.

Availability

As an employer-sponsored retirement plan, Roth 401(k)s are only available through an employer, and even then, not every employer offers this option. It can be more common to see the traditional 401(k) plan, which takes pretax contributions.

Roth IRAs, on the other hand, are open to anyone with earned income, whether self-employed or working for an employer.

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Matching contributions

Many employers offer a 401(k) match based on their employee's contributions as an employee benefit and incentive to save for retirement,. However, when it comes to Roth 401(k)s, this match could be pretax or after-tax dollars ().

While there is no match for Roth IRA contributions, some — but not all — brokerages may offer a match for IRA contributions as an incentive to open an account with them.

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Contribution limits

Another key difference between Roth 401(k)s and Roth IRAs is the annual contribution limit.

The annual 401(k) contribution limit for employees is .

In comparison, the IRA contribution limit is , and is shared across all of your IRA accounts.

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Income limits

A key feature of the Roth IRA is income limits for contributions. The amount that you can add to your Roth IRA every year depends on your filing status and modified adjusted gross income (MAGI), which means that some people won't be able to contribute the full amount or they may not be able to contribute at all.

There are no such income restrictions to the Roth 401(k), so you can make a full contribution to your account every year.

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Investment options

Because your employer sets up the 401(k) plan and chooses the provider, you're locked into that provider's investment options and fees.

When you open your Roth IRA account, you get to choose your own brokerage. That means you'll have wider access to investment options and can choose a low-cost provider to keep your costs down.

Withdrawal rules

This might be one of the largest differences between Roth 401(k)s and Roth IRAs.

With a Roth 401(k), early withdrawals of contributions and earnings before retirement may be taxed and penalized. If you need to, it may be possible to take out a 401(k) loan and borrow against the balance if your plan provider allows it.

While you can't borrow against the balance of your account with a Roth IRA, there is a massive benefit: contributions can be withdrawn tax- and penalty-free at any time. If you needed to withdraw earnings, that portion might be taxed and penalized if withdrawn for a non-qualified reason (Here's more about Roth IRA withdrawal rules).

Where are the accounts similar?

Pros and cons of a Roth 401(k)

For many, the main draw of any 401(k) plan, whether Roth or traditional, is the employer match. If offered, that’s free money going toward boosting your retirement contribution for the year. You can also add much more to a Roth 401(k) than you can to a Roth IRA.

However, there is a catch: Depending on your employer, that match could be going into a pretax 401(k) account, meaning not all of your withdrawals in retirement will be tax-free.

Secure 2.0, passed in 2022, allows employers to make matches on a Roth basis, but it’s still a good idea to double-check how it works with your employer and what you may need to pay taxes on for the match.

Another thing to consider — that isn’t a dealbreaker but a con compared with a Roth IRA — is potentially fewer investment options, as you’re stuck with the options offered by your plan provider.

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Pros and cons of a Roth IRA

Compared with a Roth 401(k), Roth IRAs typically offer more investment options, such as stocks, bonds, and more. You’re not limited by your employer’s plan provider, and you can choose to invest the money however you like. Some brokerage providers may also offer IRA matches, but there may be some fine print to wade through.

When it comes to a Roth IRA, your annual contribution rate is lower than a Roth 401(k). You can contribute $7,000 if you're under 50, and $8,000 if you're 50 or older. At certain income levels, based on filing status, directly contributing may be limited or prohibited (although there are other ways of adding money to an account).

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Roth 401(k) vs. Roth IRA: What to consider

The good news is you can have both a 401(k) and a Roth IRA and contribute to both in the same year (if you meet all the requirements). Here's one way to think about the process, and our chart below details more:

• Get the match.

  If your employer offers a company match for your 401(k), consider contributing enough to the 401(k) to qualify for that free money.

• Check investment fees.

  One recommended savings strategy is to find low-cost investments. The investments offered in your 401(k) may be excellent or lackluster. You’ll need to look at your plan to see if it offers low-cost investments. As a general rule, a mutual fund with an expense ratio of 1% or more is too expensive; ideally, you’re paying less than 0.5%.

Frequently asked questions

Is it better to invest in a Roth IRA or a Roth 401(k)?

One account is not necessarily better to invest in overall, as it depends on your financial goals, budget, and options available to you in your Roth 401(k). The best way to determine your retirement account priorities is to compare the similarities and differences between the two accounts, and see how each one — or both — aligns to your current financial situation and needs.

Can I contribute to both a Roth IRA and a Roth 401(k)?

Yes, if you meet the Roth IRA income limits, you can contribute to both a Roth IRA and Roth 401(k) in the same year.

What's the difference between a Roth 401(k) and a traditional IRA?

The main differences between a Roth 401(k) and a traditional IRA are how to obtain them, how they’re taxed, and contribution amounts. A Roth 401(k) is obtainable through an employer, if offered, whereas anyone with earned income can open and contribute to a traditional IRA. Additionally, a traditional IRA has a lower annual contribution limit and contributions are tax-deductible in the year they're made, though withdrawals in retirement are taxed as ordinary income.

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