Retirement
401(k) vs Roth IRA: Which Is Better?
A 401(k) usually lowers your taxes now, while a Roth IRA lets your money come out tax-free later. Neither is always better. The right choice depends on your employer match and whether you expect a higher or lower tax rate in retirement — and many people use both.
By the MoneyTools Editorial TeamLast updated 7 min readEditorial Policy
The key difference: when you pay tax
A traditional 401(k) takes money from your paycheck before income tax. You pay tax when you withdraw in retirement. A Roth IRA uses money you have already paid tax on, and qualified withdrawals in retirement are tax-free, including the growth.
Many employers also offer a Roth 401(k), which combines the Roth tax treatment with the higher 401(k) contribution limit.
Side-by-side comparison
| Feature | Traditional 401(k) | Roth IRA |
|---|---|---|
| Who offers it | Your employer | You open it at a brokerage or bank |
| Tax break | Now — contributions reduce taxable income | Later — qualified withdrawals are tax-free |
| Employer match | Often available | Not available |
| Income limits | None to contribute | Contributions phase out at higher incomes |
| Investment choices | Limited to the plan's menu | Usually wide choice |
| Early access | Withdrawals before 59½ usually taxed plus a 10% penalty | Your contributions (not earnings) can generally be withdrawn anytime |
| Required minimum distributions | Yes, starting in your 70s | None for the original owner |
Contribution limits and Roth IRA income limits change most years. Check the current figures at IRS.gov before contributing.
Worked example: same money, different tax rates
Suppose you have $6,000 of pre-tax pay to invest, you are in the 22% tax bracket now, and the money grows at 7% a year for 25 years (a growth factor of about 5.43).
Worked example
Traditional 401(k) vs Roth IRA
- Traditional: invest the full $6,000 → grows to $6,000 × 5.43 ≈ $32,560, taxed when withdrawn
- Roth: pay 22% tax first, invest $4,680 → grows to $4,680 × 5.43 ≈ $25,400, tax-free
- If your retirement tax rate is also 22%: traditional after tax ≈ $32,560 × 0.78 ≈ $25,400 — a tie
The winner depends on your tax rate in retirement compared with today.
| Tax rate in retirement | Traditional after tax | Roth after tax | Ahead |
|---|---|---|---|
| 12% | ≈ $28,650 | ≈ $25,400 | Traditional |
| 22% | ≈ $25,400 | ≈ $25,400 | Tie |
| 32% | ≈ $22,140 | ≈ $25,400 | Roth |
When a 401(k) usually makes sense
- Your employer offers a match — contribute at least enough to get all of it.
- You are in a high tax bracket now and expect a lower one in retirement.
- You want to save more than the IRA limit allows.
When a Roth IRA usually makes sense
- You are early in your career and in a low tax bracket.
- You expect higher income or higher tax rates later.
- You want tax-free income in retirement and more investment choices.
- Your income is below the Roth IRA limit.
A common order of priority
- Contribute to the 401(k) up to the full employer match.
- Fund a Roth IRA, if you are eligible.
- Go back to the 401(k) with any money left over.
Run your own numbers with the 401(k) Calculator and the Roth IRA Calculator. To see how much you may need overall, use the Retirement Calculator.
This guide is general education, not tax or investment advice. Tax rules are complex; consider a qualified tax professional for your situation.
Run your own numbers
Project your 401(k) balance including employer match.
Related calculators
Frequently asked questions
Related guides
How Much Should I Save for Retirement at 30, 40 and 50?
Retirement savings benchmarks by age 30, 40 and 50, the monthly amount needed to catch up, a worked example and free retirement calculators.
How Much Should I Save for Retirement? A Practical Guide
Understand the assumptions behind retirement savings targets — contributions, time, growth, inflation, employer match and withdrawals — with example scenarios and free calculators.
How Compound Interest Works: Formula, Examples & Calculator
Learn how compound interest works, the A = P(1 + r/n)^(nt) formula, monthly vs yearly compounding, and two worked examples you can check with a free calculator.