Should I Invest in a 401(k) or Roth IRA?
If you’re thinking about saving for retirement, chances are you’ve come across both 401(k)s and Roth IRAs. Both are popular retirement accounts, but they each have unique features that make them better suited for different situations.
So, which one should you invest in? Let’s break it down.
What Is a 401(k)?
A 401(k) is an employer-sponsored retirement plan that lets you contribute pre-tax money directly from your paycheck. Because the contributions reduce your taxable income now, you get a tax break today. The money grows tax-deferred, meaning you don’t pay taxes on the gains until you withdraw it in retirement.
One huge perk? Many employers offer a matching contribution, which is essentially free money toward your retirement. For example, if your company matches 50% of your contributions up to 6% of your salary, that’s an instant return on your investment.
What Is a Roth IRA?
A Roth IRA is an individual retirement account you open yourself, separate from your employer. With a Roth, you contribute money that you’ve already paid taxes on (after-tax dollars). The big benefit here is that your investments grow tax-free, and you can withdraw your money tax-free in retirement — including all your earnings, as long as you meet certain conditions.
Roth IRAs also offer more flexibility. You can withdraw your contributions (not earnings) anytime without penalties or taxes, which can be a nice safety net in case you need funds before retirement.
Comparing 401(k) and Roth IRA: Pros and Cons
A 401(k) allows you to contribute pre-tax money, which means you pay taxes when you withdraw the funds in retirement. One big advantage of a 401(k) is that many employers offer a matching contribution, essentially free money toward your retirement. However, your investment options are usually limited to what your employer’s plan offers. When it comes to withdrawals, early withdrawals before age 59½ typically incur penalties, although there are some exceptions.
On the other hand, a Roth IRA is funded with after-tax dollars, so contributions don’t reduce your taxable income now, but withdrawals in retirement are tax-free. Unlike a 401(k), Roth IRAs don’t come with employer matches, but they do offer a wider variety of investment options since you open the account yourself. Roth IRAs also provide more withdrawal flexibility: you can withdraw your contributions anytime without penalties or taxes, making them a bit more accessible if you need funds before retirement.
In 2025, the contribution limits for 401(k) and Roth IRA accounts are as follows:
401(k): The annual elective deferral limit for employee contributions is $23,500. Employees aged 50 or older can contribute an additional $7,500 in catch-up contributions, bringing the total to $31,000. For employees aged 60 to 63, a higher catch-up contribution limit of $11,250 applies, allowing for a total contribution of $34,750.
Roth IRA: The contribution limit remains at $7,000 for individuals under 50. Those aged 50 or older can contribute an additional $1,000 in catch-up contributions, totaling $8,000. However, eligibility to contribute to a Roth IRA is subject to income limits based on Modified Adjusted Gross Income (MAGI).
Which One Should You Choose?
If your employer offers a 401(k) match, the smart move is to contribute at least enough to get the full match. That’s free money and a guaranteed return on your investment.
Once you’re getting the full match, if you have extra money to invest, consider opening a Roth IRA for the tax-free growth and more flexible withdrawal options. A Roth is especially appealing if you expect to be in a higher tax bracket in retirement or want to avoid paying taxes later.
Can You Do Both?
Absolutely! Many people contribute to both a 401(k) and a Roth IRA to take advantage of the benefits each offers. Maxing out both accounts can be a powerful way to build a tax-diversified retirement portfolio.
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Choosing between a 401(k) and a Roth IRA isn’t about one being “better” than the other — it’s about what fits your financial situation and retirement goals. Start with the employer match in your 401(k), then add a Roth IRA if you can. Over time, contributing consistently to both accounts can help you retire comfortably and with more tax flexibility.
If you want personalized advice on which retirement account to prioritize or how to balance your contributions, book a free consultation with one of our expert financial consultants.
