Roth IRA vs. 401(k): taxes now, or later?
Roth IRAs and 401(k)s are types of retirement accounts that differ when it comes to taxes. With one, you pay taxes now, and with the other, you pay taxes later. Here’s what you need to know about both types of accounts.
Summary
A Roth IRA and a 401(k) are both types of retirement accounts, but have different tax advantages.
The Roth IRA is an account where you pay taxes now and let the sum grow tax-free and be withdrawn tax-free. You have more control over your investment options, but the contribution limit is much lower than for a 401(k).
A 401(k) is an account set up by an employer where taxes are paid when you withdraw money from the account in retirement. A 401(k) may have a big advantage if your employer matches your contributions.
Unbiased can connect you to a financial advisor to discuss your unique retirement situation.
What is a Roth IRA vs. 401(k)?
Understanding the differences between a Roth IRA and a 401(k) will change the way you pay taxes.
With a Roth account, you pay taxes upfront, betting that taxes will be more later.
With a 401(k), the tax is paid in retirement, theoretically when you’re making less money without the income source from your job.
What is a Roth IRA?
A Roth IRA is a retirement account you set up on your own with a financial institution.
Your contributions will hit this account after taxes have been taken out. For some on the higher income level, that could be as high as 24%.
Roth IRAs have contribution limits that are much lower than a 401(k). This might affect your decision on whether or not to open one.
Learn more: Roth IRA contribution and growth calculator
What is a 401(k)?
A 401(k) is the name of a type of tax-advantaged account where your retirement funds go.
The tax treatment of a 401(k) indicates that the account receives distributions that have not been taxed.
Contributions made to a 401(k) account are deducted from a person’s salary and not counted as taxable income. They grow tax-free and aren’t taxed as income until a qualified withdrawal is made at retirement.
An important note about 401(k)s is that your employer may offer a matching contribution. If you contribute $300 per month, they will contribute $300 per month for you. This is essentially free money. With this, you may have a vesting period before this money becomes fully yours.
One thing to look for is the vesting schedule. This is the amount of time you need to be with your employer before the money is fully yours. Some employers vest that money immediately, while others have a vesting schedule where you gradually earn the right to keep the money.
Roth IRA vs. 401(k): Which is better?
Deciding whether a Roth IRA or a 401(k) is better depends on your perspective on taxes and your employment situation. Let’s explain.
A Roth IRA is opened under the assumption that you believe your taxes will be higher in the future, and paying taxes now will be less than in the future. Thus, a Roth IRA is better suited to people who want to pay taxes now rather than take a chance on taxes being low in the future.
In short, if you think you’re going to be wealthy in your later years, pay taxes now. If you think taxes are going up in the future, pay taxes now.
In contrast, if you think you won’t be making much money in retirement, defer those taxes in a 401(k) account and pay them later.
There’s not generally a consensus among experts on whether you’re looking to choose one or the other. It’s best to speak to a financial advisor for your individual situation.
What is the benefit of a Roth IRA vs. a 401(k)?
Both the Roth IRA and 401(k) have benefits to them. Here’s a summary of these benefits and how it affects your money.
Benefits of a Roth IRA
Pay taxes now: When you pay taxes off the top, your contributions grow tax-free and are never taxed again. If you think the market and your account are set to grow exponentially, you’ll see a lot of savings.
Tax-free retirement income: Paying taxes now means you don’t need to pay taxes in retirement.
More flexibility with contributions: There’s no penalty for taking out contributions at any time, which is unlike a 401(k).
No required minimum distributions: Roth IRAs don’t have required minimum distributions for the original account holder. This gives you more control over your retirement funds.
Inherited tax-free: There are some benefits to leaving a Roth IRA to your heirs, and some circumstances where the money is inherited tax-free.
Benefits of a 401(k)
You pay taxes when you take a distribution: In retirement, when you’re not working, these may be less.
Larger limits: You can contribute up to $23,500 tax-free in 2025 to your 401(k). If you’re over 50, you have an additional $7,500 in catch-up contributions allowed each year. Contribution limits for an IRA are $7,000 for people under 50 and $8,000 for those over 50.
Employer match: With a 401(k), there’s often an employer match or contribution of some sort. It could be a dollar amount or a percentage of your income. Either way, it’s basically free money that you need to take advantage of.
Lowers your taxable income now: When you contribute to a 401(k), you don’t pay taxes on that money now. It goes directly into your retirement account before your employer takes taxes out. For example, if your monthly income is $4,000, and you contribute $500 to your 401(k), your taxable income is $3,500 instead of $4,000.
Convenient: The contribution to a 401(k) is taken care of before you see your paycheck. The automatic component helps your retirement account grow.
Can you have a Roth IRA and a 401(k)?
Yes, you can have both a Roth IRA and a 401(k).
If you already have a 401(k) with your employer with a good match, but you also want a Roth IRA account, simply find a provider and open a Roth IRA account.
There are many banks, brokerages, and financial institutions that offer Roth IRAs. Some of these providers include:
Be mindful of the fees, customer service, and features available at each service provider.
If you’re looking at opening a Roth IRA account in addition to a 401(k), you might feel more comfortable after speaking to your financial advisor. Unbiased can connect you to a financial advisor for any type of financial advice.
How to choose between a Roth IRA and a 401(k)
Choose a 401(k): If your employer offers an employer match for a 401(k), be sure to fill out the paperwork to take advantage of that. There’s not a lot of downside to accepting your employer match, but you do need to have a place to put it. Opt in to your company’s 401(k) if it’s available.
If you exceed the income limit for a Roth IRA, you’ll also want to opt into a 401(k).
Choose a Roth IRA: If you want an additional retirement account or like the flexibility of a Roth IRA, you can open one and add it to your portfolio. The growth in a Roth IRA is tax-free. You won’t be taxed on the growth of your compound interest. Pay taxes upfront, and you’re generally done. A Roth IRA gives you a lot of flexibility in receiving distributions in retirement.
Here’s a breakdown of how a Roth IRA compares with a 401(k).
| | Roth IRA | 401(k) |
|---|---|---|
| | Roth IRA | 401(k) |
| Employer match | No | Yes |
| Tax treatment | Taxed immediately | Taxed on distributions |
| Contribution limit | Contribution limit up to $7,000 for people under 50, $8,000 for those over 50 | Contribution limit up to $23,500 for people under 50; up to $31,000 for people over 50 |
| Investment choices | Varies by institution – generally, very wide | Limited to the plan sponsor’s options |
| Fees | Varies by provider | Varies by provider, usually covered by your employer while you work for them |
| Where you get one | Banks, brokerages, or financial institutions you find | Sponsored by your employer |
| Income limits | Singles: Full contribution limit allowed for incomes up to $150,000; partial contributions allowed from $150,000 to $165,000; None over $165,000 | No limits |
| Married: Full contribution limit allowed for incomes up to $236,000; partial contributions allowed from $236,000 to $246,000, and none for incomes over $246,000 | No limits | |
| Who controls it | You | Your employer or plan sponsor |
Get expert financial advice
Getting your retirement on track now will set you up for success later. It’s smart to plan for retirement as early as possible. Choosing an investment account (or using both) is just the start.
You can connect to a financial advisor now with Unbiased. It’s free and customized to meet your needs. It’s easy and allows you to take action now.
Content Writer
Alene Laney is an award-winning journalist for Unbiased, where she breaks down financial topics related to retirement, investing, and banking. She specializes in helping readers make the best decisions for their money with long-form content for brands and consumer publications.