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5 Surprising Differences Between Roth IRAs and Roth 401(k)s

Even if you know nothing about retirement accounts, you could probably guess that Roth IRAs and Roth 401(k)s have something in common. They’re both funded with after-tax dollars, which means you pay taxes on your contributions in the year you make them. In exchange, you’re allowed tax-free withdrawals in retirement.

But beyond this, the two accounts actually have a lot of differences. Here are five of the most important you should know if you plan to keep Roth savings for retirement.

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1. Who can contribute

Anyone can contribute to a Roth 401(k) as long as their employer offers one of these plans. You can contribute to one of these regardless of your income.

This isn’t the case with Roth IRAs, though. You can open one of these accounts on your own, but they have income limits prohibiting high earners from contributing directly to them. However, a backdoor Roth IRA is still a possibility for those who are willing to jump through a few extra hoops.

2. Contribution limits

Roth 401(k)s have much higher contribution limits than Roth IRAs. You can contribute up to $23,000 to a Roth 401(k) in 2024 or $30,500 if you’re 50 or older. But you can only save $7,000 in a Roth IRA or $8,000 if you’re 50 or older.

This makes the Roth 401(k) a better fit for those who hope to set aside a large amount of Roth savings this year. But you could also max out your Roth IRA first and then fall back on your Roth 401(k) as a backup.

3. Investment options

Most 401(k) plans, including Roth 401(k)s, limit you to a few investment choices your employer selects. These aren’t always bad choices, but they might not be the best options for you, either. If you get stuck with investments that charge high fees, this could slow the growth of your savings.

Roth IRAs give you a lot more freedom to invest your money how you wish. You can invest in individual stocks and bonds or go with the same index funds or target date funds you can find in many Roth 401(k)s.

4. Employer match

Roth IRAs are individual retirement plans, so there’s no opportunity to get an employer matching contribution. But this is a possibility with Roth 401(k)s. Employers aren’t required to offer 401(k) matches, and those that do are free to choose their own matching formula. Generally, you get $1 or $0.50 for every $1 you contribute up to 4% to 6% of your annual income.

It’s worth noting that these matching contributions may not be Roth funds. Prior to 2024, all employers had to make pre-tax matching contributions to Roth 401(k)s. Roth matching contributions are now a possibility, though some employers continue making pre-tax matches. Check with your company if you’re not sure how your Roth 401(k) match works.

5. Withdrawals of contributions

Roth IRAs permit you to withdraw your contributions tax- and penalty-free at any age. This makes them a good fit for those who plan to retire early and want to avoid the IRS’s 10% early withdrawal penalty for retirement withdrawals under 59 1/2.

This isn’t an option for Roth 401(k)s. If you make an early withdrawal, the government looks at the proportion of contributions and earnings in your account and uses this to determine how much of your withdrawal is taxable. For example, if your Roth 401(k) balance is 90% contributions and 10% earnings and you withdraw $10,000, $1,000 of that would be taxable because it came from earnings.

Which is better?

Roth IRAs and Roth 401(k)s both have their pros and cons. There’s no reason you have to limit yourself to just one if you’re eligible to contribute to both. But it’s usually a good idea to put your savings where you feel they will do you the most good.

If you qualify for a Roth 401(k) match, this account is the best place for your savings at least until you’ve claimed the whole thing. This is true even if your match is pre-tax. Otherwise, you might prefer the flexibility a Roth IRA offers. And if you max it out, you can always return to your Roth 401(k) for the rest of the year.

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