401(k) vs Roth IRA: Which Should You Choose?
A 401(k) is a retirement plan offered through an employer, usually with pre-tax contributions and sometimes an employer match. A Roth IRA is an account you open yourself, funded with money you have already paid tax on, and qualified withdrawals in retirement are tax-free. You do not have to pick only one. For many people the best order is: 401(k) up to the match, then a Roth IRA, then more into the 401(k).
The key difference: when you pay tax
- Traditional 401(k): contributions come out of your paycheck before income tax, which lowers your taxable income now. You pay income tax when you withdraw in retirement.
- Roth IRA: you contribute after-tax money, with no deduction now. Qualified withdrawals in retirement, including the growth, are tax-free.
Many employers also offer a Roth 401(k), which combines the 401(k) structure with Roth tax treatment.
A simple example of the tax trade-off
Say you have $10,000 of pre-tax pay to save and you are in the 22% federal bracket. Assume the money grows four times by retirement.
| Traditional | Roth | |
|---|---|---|
| Tax paid now | $0 (deduction) | $2,200 |
| Amount invested | $10,000 | $7,800 |
| Balance after growth (4x) | $40,000 | $31,200 |
| After-tax if taxed at 22% in retirement | $31,200 | $31,200 |
| After-tax if taxed at 12% in retirement | $35,200 | $31,200 |
The lesson: if your tax rate in retirement is the same, the two end up equal. Traditional wins if your rate is lower in retirement, and Roth wins if it is higher. Nobody knows future tax rates, which is why many people use both types.
Contribution limits and rules
The limits are set by the IRS and change over time. For 2026 the 401(k) employee limit is $24,500 and the IRA limit is $7,500, and people age 50 and over can contribute more. Always confirm the current numbers on IRS.gov before you plan.
- Income limits: Roth IRA contributions phase out at higher incomes. The IRS publishes the exact ranges each year. A 401(k) has no income limit.
- Employer match: only available in the 401(k). The match is usually deposited pre-tax.
- Investment choices: a 401(k) offers the funds your plan selected. A Roth IRA lets you choose almost any fund or stock at your broker.
- Early access: you can take out your own Roth IRA contributions (not earnings) at any time without tax or penalty. Early withdrawals from a 401(k) usually cost tax and a 10% penalty, with some exceptions.
- Required withdrawals: traditional accounts require withdrawals starting later in life. Roth IRAs do not require them during your lifetime.
A sensible order for most people
- Contribute to your 401(k) enough to get the full employer match. It is an instant return on your money.
- Open and fund a Roth IRA if you are under the income limit.
- Go back to the 401(k) and increase contributions toward the yearly limit.
- Consider a taxable brokerage account after that.
Before doing this, make sure you have no high-interest debt and a small emergency fund. See pay off debt or invest for that decision.
Which one if you are early in your career?
If you are in a low bracket now, such as 10% or 12%, a Roth is attractive because you pay little tax today and your future income and tax rate may be higher. If you are in a high bracket now, such as 24% or above, the traditional deduction is worth more today. Mid-career people often split between both.
An example with an employer match
Say you earn $60,000 and your plan matches 50% of your contributions up to 6% of pay. You contribute $3,600, your employer adds $1,800, and $5,400 goes into the account each year, or $450 a month. If it grows at an average of 7% a year for 30 years, the balance would be about $549,000 from $162,000 deposited. Returns are not guaranteed, but the example shows why the match is so valuable. The 401(k) calculator lets you try your own pay and match.
A third option: the HSA
If you have a high-deductible health plan, a Health Savings Account (HSA) offers a tax deduction when you contribute, tax-free growth and tax-free withdrawals for qualified medical costs. Many people consider it as a strong option in their order of priorities, but only if you are eligible.
Mistakes to avoid
- Cashing out a 401(k) when you change jobs. It usually triggers income tax and a 10% penalty.
- Leaving the money uninvested. Opening an account is not enough, you must choose investments inside it.
- Contributing to a Roth IRA above the income limit. Excess contributions can be penalized each year until fixed.
- Forgetting to update beneficiaries. Retirement accounts pass to the person named on the form.
Try it with your numbers
The 401(k) calculator shows your balance with an employer match, the Roth IRA calculator shows tax-free growth, and the retirement calculator shows whether your savings are on track. Changing the contribution or the number of years shows how quickly the totals change.
Try the calculators
Frequently asked questions
Can I have both a 401(k) and a Roth IRA?
Yes. They are separate accounts with separate limits. Roth IRA eligibility depends on your income.
Is a Roth IRA better than a 401(k)?
Neither is always better. The 401(k) wins when there is an employer match. The Roth IRA often wins on flexibility and tax-free withdrawals.
What happens to my 401(k) if I change jobs?
You can usually leave it, roll it into the new employer's plan or roll it into an IRA. Do not cash it out without understanding the taxes and penalties.
This guide is for general information. Figures use 2026 US federal rules and the assumptions stated above, and are estimates, not financial, tax or legal advice. Check IRS.gov or a qualified professional for your situation.