Roth IRA vs. 401(k): Which Should You Choose?

Differences between investing in a Roth IRA vs. 401(k)

With a Roth IRA, the onus is on you to open the account (usually at a popular online brokerage company’s website) and then fund it. With a 401(k), contributions come directly from your paycheck through your employer’s payroll system.

Beyond traditional 401(k)s, how do Roth IRAs differ from Roth 401(k)s?

A Roth 401(k) works like a Roth IRA in some ways and like a 401(k) in other ways. We know that “Roth” means contributions are made after-tax. A Roth 401(k) is simply another employer-sponsored retirement account.

Roth IRAs Offer Withdrawal Flexibility vs. A Roth 401(k)

A Roth IRA differs from a Roth 401(k) in that contributions made to a Roth IRA can be withdrawn tax-free and penalty-free at any time. Inside a Roth 401(k), the plan participant faces a 10% early withdrawal penalty on withdrawals made before age 59½.

When should you choose one vs. the other

Your situation is paramount when deciding on retirement saving strategies. However, it is wise to ensure you get the most out of these tax-advantaged accounts. Snatching the company 401(k) match is usually a good first move.

Contribute to the 401(k) Plan Match, Then Go for the Roth IRA

Roth IRAs are more flexible than 401(k) plans since you can withdraw your contributions at any time tax-free and penalty-free. With more investing options—often at a lower cost—you can keep more of what’s yours in an IRA versus a 401(k).

Resources to Help You Choose How to Save for Retirement

In contrast, younger workers in their low-earning years might be better suited to choosing after-tax Roth contributions. Here is a tip: Be sure to research online calculators to help determine which contribution type and account type are ideal for your situation.

Super-Saver Make Retirement Contributions

Super-savers can contribute to both a Roth IRA and 401(k). In 2022, a worker under age 50 could hypothetically put $6,000 into a Roth IRA and $20,500 into a 401(k). 

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