Want tax-free retirement income? See if you should choose a Roth IRA or 401(k).

Both Roth 401(k)s and Roth IRAs let you save after-tax money and enjoy tax-free growth and withdrawals in retirement—but how do you decide which Roth is the best fit for your finances? If you have a Roth 401(k) at work, that plan will likely come out on top—especially if your employer offers a match. But both are powerful savings tools, and the best choice will come down to your income and plan access.

Roth 401(k) vs. Roth IRA

A Roth 401(k) is an employer-sponsored retirement plan. Your employer may offer one, or you can establish one for your business if you’re self-employed. You contribute through payroll deductions, and your employer can boost your savings by matching a portion of your contributions. If you leave your job, you can roll your savings into another Roth 401(k) or a Roth IRA, but you can no longer contribute to your old Roth 401(k).

A Roth IRA is a tax-advantaged personal retirement account that you open yourself, typically through a brokerage company or robo-advisor. Unlike a Roth 401(k), your contribution ability isn’t tied to your employer. Instead, you simply need to have earned income for the year—and not necessarily from a job.

Both Roth 401(k)s and IRAs have annual contribution limits set by the IRS. 

Now that you know the basics, let’s take a deeper look into each plan type.

What is a Roth 401(k)?

A Roth 401(k) is a designated account within a 401(k) that allows after-tax contributions and tax-free qualified withdrawals. It mostly works like a regular 401(k), though some key differences are important to understand.

How does a Roth 401(k) work?

If your employer offers a 401(k), you can make Roth contributions, pre-tax (traditional) contributions, or a combination of the two.

Roth 401(k) contributions are subject to the same limits as regular 401(k) contributions. You can contribute up to $22,500 for 2023 or up to $30,000 if you are 50 or older. This is a combined 401(k) limit, which applies jointly to pre-tax and Roth contributions.

Contributions are not deductible, but the flip side is that you can withdraw your money completely tax-free as long as you meet the qualified distribution criteria. This generally means it’s been at least five years since your first Roth 401(k) contribution, and you are 59 ½ or older. However, you can also qualify if you are disabled or distributions are made after your death.

One big benefit of a Roth 401(k) is that your employer can match your contributions. Currently,  employers must deposit matching contributions into the pre-tax portion of your 401(k), even if you’re making Roth contributions. Starting in 2024, however, employers can match into your Roth 401(k) account. However, it’s unclear if and when employers will start offering that option. 

Another big perk for Roth 401(k)s starting in 2024 is that these accounts won’t be subject to required minimum distributions (RMDs), giving you complete control over how and when you take those tax-free withdrawals.

The investment options within a Roth 401(k) are limited to those included in your employer’s plan, which can work for you or against you. “One downside of a Roth 401(k) is that it may have limited or more expensive investment options,” says Cody Garrett, a certified financial planner and owner of Measure Twice Financial in Houston, TX. “On the other hand, it may have institutional mutual fund share classes that could be cheaper.”

While you can’t control plan or investment costs in your 401(k), you can use this information in your decision-making process when deciding whether to focus your savings on a 401(k) or IRA.

Pros and cons of Roth 401(k)s

Roth 401(k)s are a powerful way to accumulate tax-free retirement savings, but there are a few downsides to consider.

What is a Roth IRA? 

Unlike a Roth 401(k), Roth IRAs are individual retirement plans that you open outside of your employer. You choose the broker for your Roth IRA, select investments, and make contributions as often as you like.

Without your employer to help you with the sign-up process, you’ll have some legwork to set up your Roth IRA. However, you’ll enjoy more control than you would with a Roth 401(k). One of the biggest benefits of a Roth IRA, especially when compared to a Roth 401(k), is the flexibility. 

How do Roth IRAs work? 

You can open a Roth IRA with just about any brokerage company or robo-advisor, and you can invest in almost anything you’d like—-stocks, bonds, mutual funds, exchange-traded funds (ETFs), and even real estate, cryptocurrency, and commodities. 

“You can go to whatever brokerage house you want and open a Roth IRA in a few minutes,” says Noah Damsky, CFA, Co-Founder of Marina Wealth Advisors in Los Angeles, CA “So if you want to sock away a couple thousand bucks into a retirement plan, a Roth IRA is going to be a much more straightforward option than a Roth 401(k).”

For 2023, you can contribute up to $6,500 ($7,500 if you’re 50+) in a Roth IRA. However, Roth IRAs have income limits that Roth 401(k)s don’t, which may disqualify you from making direct contributions. Single filers are ineligible once their income reaches $153,000. Contributions are phased out for married couples filing jointly once their income reaches $228,000.

If you earn too much to contribute to a Roth IRA directly, you could explore alternative strategies like a Roth IRA conversion or a backdoor Roth IRA. They each have specific steps you’ll need to follow to avoid unnecessary taxes and penalties, so consulting a tax advisor could be helpful.

Just like a Roth 401(k), contributions to a Roth IRA aren’t tax-deductible, but qualified withdrawals are tax-free. A withdrawal typically counts as qualified if you’ve had the Roth IRA for at least 5 years and are at least age 59 ½, though you may also be able to make tax-free withdrawals if you are disabled or purchasing your first home (up to $10,000).

One of the standout benefits of a Roth IRA is that you can access your contributions at any time and for any reason without paying taxes or penalties. However, you should do this with caution  since Roth IRAs are designed as long-term retirement accounts, but it’s a layer of flexibility that can come in handy in emergencies.

Another benefit of a Roth IRA is that you can make your Roth IRA contributions any time up until the April tax filing deadline of the following year. This provides a lot of flexibility for you to contribute when you have the money, even after the end of the year.

Pros and cons of Roth IRAs

While Roth IRAs offer a wide range of flexibility, from brokers to investments, they do have their drawbacks compared to Roth 401(k)s.

Roth IRA vs. Roth 401(k): how to choose

If you have access to both a Roth IRA and a Roth 401(k), the 401(k) option will generally come out on top. “Contribute to the Roth 401(k)—at least up until the point where you get the full employer match,” says Garrett. “Then, I would focus on the Roth IRA because it provides additional flexibility for distributions even while working.” He adds that once you’ve maxed out your IRA, you can decide whether to jump back in and continue contributing to the Roth 401(k).

However, there are other situations where one account or another may make sense.

A Roth 401(k) might be better if…

• Your employer offers a matching 401(k) contribution.
• You earn too much to make direct Roth IRA contributions.
• You like the simplicity of consolidating all of your savings in a single account.
• You’d like to save more for retirement than the annual Roth IRA contribution limits allow.

A Roth IRA might be better if…

• Your employer doesn’t offer a Roth 401(k).
• You want more control over your investment options and fees.
• You want the option to access your contributions before age 59 ½.
• You prefer the flexibility of making contributions as you can instead of each payday.
• Your employer doesn’t offer a 401(k) match, and you don’t plan on saving more than the annual IRA limit.

The takeaway

When you stack up a Roth 401(k) vs. Roth IRA, you’re looking at tax-free retirement income either way. But if you have a Roth 401(k) option at work and your employer offers a match, it’s best to contribute enough to get the full match. From there, you can decide whether to focus on a Roth IRA with more investment flexibility or continue with the 401(k).