Roth IRA vs. 401(k): Which Should You Choose?

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A Roth IRA differs from a Roth 401(k) in that contributions made to a Roth IRA can be withdrawn tax-free and penalty-free at any time.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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