Should You Choose a Roth IRA Over a 401(k) for Retirement Savings?

Key Points

• Money in a Roth IRA can be withdrawn tax-free after you reach retirement age.

• The 401(k) has a much higher contribution limit, and often an employer match.

• The $23,760 Social Security bonus most retirees completely overlook ›

For many of us, retirement may seem far away. However, if you ask people who have already retired, many of them will tell you just how fast it can creep up on you. That's why it's important to begin financially preparing for retirement as early as possible.

One of the best ways to do that is to invest through tax-advantaged retirement accounts. The most popular retirement account is the 401(k), and for good reason. It's relatively simple, doesn't require much oversight, gives you an immediate tax break on the funds you contribute, and often comes with matching contributions from your employer.

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However, there are a handful of other types of accounts that can be just as valuable. One of those is a Roth IRA, which allows you to contribute after-tax money and then take tax-free withdrawals in retirement. Considering the deferred tax break that a Roth IRA offers, should you choose it over a 401(k)?

The short answer is no, but it's not quite that simple.

Image source: Getty Images.

You can't beat the Roth IRA's tax break

I mentioned the Roth IRA's tax-free retirement withdrawals, but seeing the math of how that benefit works in practice really puts into perspective how valuable it can be. Right now, the maximum amount you can contribute each year to a Roth IRA is $7,000, or $8,000 if you're 50 or older. (Every few years, the government has habitually boosted the ceiling in response to inflation, but there's no knowing when the next hike will come.)

Let's assume you invest $7,000 yearly and average 10% annual returns for 20 years. At the end of those 20 years, you'd have a Roth IRA balance of just under $400,700, but you'd have only personally contributed $140,000. In a standard brokerage account, you'd owe taxes on the difference -- your capital gains -- whenever you sell your investments. When you invest through a Roth IRA, the full $400,700 can be taken out tax-free.

Being able to have your investments grow and compound with tax-free withdrawals on the back end is a benefit that can easily save you thousands of dollars in taxes during your golden years.

Roth IRAs offer more flexibility than 401(k)s

One of my least favorite aspects of the 401(k) is that it usually provides you with only a fairly short menu of mutual funds and exchange-traded funds to choose from, picked by the plan administrator. Depending on your investing style and the investments you're interested in, this can be limiting.

When you invest using a Roth IRA, you can buy any stock or exchange-traded fund (ETF) that you could in a regular brokerage account. This gives you the option to invest in single stocks you're interested in -- which is rarely possible with company-sponsored 401(k) -- ETFs and mutual funds of all stripes, or whatever you see fit.

The flexibility doesn't stop at investments, either. Roth IRAs also offer more withdrawal flexibility. You can withdraw your contributions -- but not your earnings -- at any time without penalty. It's not advisable to take early withdrawals from your retirement accounts, but tapping a Roth IRA can be helpful for things like purchasing your first home, paying higher education expenses, or covering your health insurance premiums while you're unemployed.

Image source: Getty Images.

Where a 401(k) shines

One of the best benefits of a 401(k) is its fairly passive nature. With a Roth IRA, you have to actively pick your investments to make your contributions (although you can use automatic transfers). With a 401(k), once you choose how much of your paycheck you're going to contribute and which funds you want the money to go into, everything else is automatically done for you behind the scenes, every time you get paid. This makes saving for retirement relatively effortless.

401(k)s also have much higher annual contribution limits. In 2025, the contribution limit is $23,500, with a catch-up contribution of up to $7,500 for those who are 50 to 59 that brings the total limit to $31,000. Those who are 60 to 63 can make catch-up contributions of up to $11,250, bringing their limit to $34,750.

Although most people won't be able to max out their 401(k) contributions yearly, those higher limits allow you to invest more money for retirement, giving you a greater chance of securing your financial future.

So, should you choose a Roth IRA over a 401(k)?

Ideally, you should take advantage of both a 401(k) and a Roth IRA. I typically recommend that someone first contribute enough to their 401(k) to get the maximum employer match available to them. If your employer matches funds up to 5% of your wages, you shouldn't contribute anything less than 5% -- to do so would be to leave free money on the table.

But once you're contributing enough to get all of those matching funds, I say switch your focus to maxing out your Roth IRA contributions. If you still have the financial capacity to set aside more for retirement after you hit that limit, then go back to increasing your 401(k) contributions.

This gives you a "best of both worlds" scenario. By contributing to a 401(k), you'll lower your taxable income for the current year and benefit from immediate tax savings, while using a Roth IRA allows you to build a nest egg you can tap tax-free down the road.

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