Roth 401K vs. Roth IRA What's the Difference?

Korey Knepper |
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Education
Investments
Retirement

The Roth account type is arguably the best tax advantage account type out there. You pay taxes on the money, and then invest it with the ability to pull it out tax-free if you qualify. There are ways to qualify for early withdrawal, but for the most part, to enjoy that tax-free withdrawal, you must be over 59 ½. This is the same for any Roth account, 401K, 403B, TSP, or IRA. There are some slight differences between the Roth IRA, and the Roth 401K. For the purposes of this article, we will use the Roth 401K to represent all the Roth employer sponsored plans. There are four main differences.

  1. Max Contribution – The max contribution for a Roth IRA is much lower than the 401K. The IRA is $7000 for 2024, with the ability to add $1000 for catchup contributions if you are over the age of 50. The Roth 401K has a max contribution of $23,000, with the catchup contribution being an additional $7500, for a total of $30,500.
  2. Contribution dates – Since a 401K is tied to payroll deductions, you can only contribute for the year you are in. For example, in 2024, you can contribute from January 1st to December 31st.  The IRA is different since it is not tied to a payroll deduction, so you can make contributions for 2024 starting on January 1st until April 15th in 2025.
  3. Income Limits – There is no income limit on a Roth 401K, which is the biggest positive it has over the Roth IRA. It is one of the reasons why it is a massive wealth building tool. The Roth IRA, however, does have income limits. In 2024, those limits are $161,000 for single tax filers, and $240,000 for married filing jointly. There is also a phase out period before that, starting at $146,000 for singles, and $230,000 for married.
  4. Investment Freedom – This is the biggest positive the Roth IRA has over the Roth 401K. Where a Roth IRA can invest in almost any security, the Roth 401K is limited to the plan. If the plan only has target funds, you only have target funds. Whereas a Roth IRA can invest in whatever securities you want (if they are available on the platform/custodian you use), and how you want. If you want to purchase options in a Roth IRA, you can, however, that is not possible in a 401K.

Roth accounts should be a piece of your retirement plan. The tax-free withdrawals, along with the no RMDs (required minimum distributions) make it one of the best long term wealth building tools out there. If it is not a part of your plan and you would like it to be, you can set up a call here to discuss how to make it a part of your plan. As always, thanks for reading!