7 Must-Know Differences Between 401(k)s and Roth IRAs

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Which account is right for your retirement savings goals? 

If you want to save for retirement, it makes sense to do so in a tax-advantaged account. You have a number of options for these types of accounts, although which ones you can use will vary depending on factors including what retirement plans your employer offers and how high your income is.

There are two very popular options to choose from. You may be able to open a 401(k), which employers make available. You can also opt for a Roth IRA account. These can be opened with any brokerage firm.

Although both come with tax benefits and can be great ways to save for your future, there are key differences between them. Here are seven discrepancies to be aware of so you can make a fully informed choice about where to put your retirement savings dollars.

1. Eligibility rules are different

You need earned income to contribute to a Roth IRA, and your income can’t exceed a certain threshold, which varies by year. As long as you meet these requirements, you are eligible to make tax-advantaged contributions to a Roth IRA.

A 401(k), however, is typically available to you only if your employer offers one. If you’re a small business owner, you may choose to open a solo 401(k) on your own. If your employer offers a 401(k), you can contribute to the account even if your income is high — there’s no upper limit.

2. Contribution limits vary

There is a much higher contribution limit for a 401(k). In 2023, you can put in up to $22,500 per year or up to $30,000 if you’re 50 or over. Your employer can also contribute on your behalf.

The maximum you can contribute to a Roth IRA in 2023, on the other hand, is $6,500 or $7,500 if you’re 50 or over.

3. Tax breaks differ

With a 401(k), you get to claim your tax break upfront. Your contributions are made pre-tax, so the amount of your contribution is subtracted from your taxable income and you don’t pay taxes on it. When you take money out in retirement, you do pay taxes on the distribution.

With a Roth IRA, you contribute with after-tax dollars. But distributions in retirement are tax free. If you think your tax bracket will be higher in retirement, this is likely the better option.

4. Only one account offers the potential for an employer match

Many 401(k) accounts come with an employer match. This means your company that sets up the account offers to match the contributions you make. This is essentially free money, and it always makes sense to invest what you need to in order to earn the full match.

You won’t get a match with a Roth IRA.

5. Rules for required withdrawals differ

You must take required minimum distributions (RMDs) with a 401(k) starting at age 72. This means you have to withdraw a certain amount each year to avoid hefty penalties. This isn’t required with a Roth IRA.

6. Your investment choices differ

Typically, you are restricted to a limited number of investments in your 401(k). Your plan may offer a dozen or fewer funds you can invest in. With a Roth IRA, though, you can invest in whatever your brokerage offers — which is usually almost anything.

7. Rules for early withdrawals differ

You can withdraw contributions from a Roth any time without penalty, although you are penalized if you take out earnings or gains. With a 401(k), you always face a 10% penalty if you withdraw money before age 59½ — unless you fit into a limited hardship exception.

You should be aware of all of these differences so you can decide what account makes sense for you. Think about your preferred withdrawal rules, whether you want lots of investment options, and whether you have a match to take advantage of when you decide where to put your retirement dollars.

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