Deciding Between a Roth IRA vs. 401(k)? Here's What You Need to Know

The Roth IRA and 401(k) are two of the most popular retirement accounts. Choosing which strategy is best for your circumstance can be a tough decision.

What are the differences between investing in a Roth IRA vs. 401(k)?

With a Roth IRA, the onus is on you to open the account (usually at a popular online brokerage company’s website) and then fund it. With a 401(k), contributions come directly from your paycheck through your employer’s payroll system.

Snatch the 401(k) Match

It’s also important to consider how employer matching contributions work within a 401(k) plan. Many firms have a matching policy; for example, 50% of the first 6% of contributions. That means, if you earn $100,000 and contribute $6,000 per year into your 401(k), your employer will pop in another $3,000 at no cost to you.

Early Withdrawal Rules

The IRS also allows you to take out earnings from a Roth IRA penalty-free in some situations. Some of the more common reasons to take the earnings out of a Roth IRA early include money for a first-time home purchase, qualified education expenses, qualified medical expenses, and for disability or death.

Beyond traditional 401(k)s, how do Roth IRAs differ from Roth 401(k)s?

A Roth 401(k) works like a Roth IRA in some ways and like a 401(k) in other ways. We know that “Roth” means contributions are made after-tax. A Roth 401(k) is simply another employer-sponsored retirement account, but money in that account has already been taxed and will grow tax-free through retirement.

Roth IRAs Offer Withdrawal Flexibility vs. A Roth 401(k)

A Roth IRA differs from a Roth 401(k) in that contributions made to a Roth IRA can be withdrawn tax-free and penalty-free at any time. Inside a Roth 401(k), the plan participant faces a 10% early withdrawal penalty on withdrawals made before age 59½.

Annual Contribution Limits

A Roth IRA also has a lower annual contribution limit than a Roth 401(k). According to the IRS, the maximum IRA contribution for 2021 and 2022 is $6,000 ($7,000 for those age 50 or older). 

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