Importance of retirement savings

When you’re saving for retirement, one of the most important decisions you’ll have to make is the best type of account to use. Roth accounts are becoming increasingly popular for retirement savings thanks to their tax-free investment growth potential and qualified withdrawals.

There are two major types of Roth accounts: the Roth 401(k) and the Roth IRA. These two accounts have some key similarities, including their tax advantages. However, they also differ when it comes to their contribution limits, investment options, withdrawal rules, and more.

If you’re considering these account types, it’s important to weigh the pros and cons of each to determine which works best for your situation — and you may even decide to use both.

What is a Roth 401(k)?

A Roth is a feature of many 401(k) and similar employer-sponsored retirement plans. Roth contributions are made on an after-tax basis and any investment earnings on Roth contributions are tax-free subject to various requirements.

The Roth 401(k) was introduced in 2006 to give Americans a new type of retirement savings vehicle to complement the popular Roth IRA, which was introduced in 1997. Roth IRAs and Roth 401(k)s are similar, but there are some pretty significant differences you should understand when deciding which one is right for you.

What is a Roth IRA?

A Roth IRA is an individual retirement account that individuals can open separate from their employer-sponsored plan. It can be used either as an alternative to or in conjunction with a workplace retirement plan like a 401(k), 403(b), or 457(b).

The Roth IRA is specifically designed for low and middle-income workers. Income limits prevent higher earners from taking full advantage.

Read more: What is a Roth IRA?

Roth 401(k) vs. Roth IRA: How are they similar?

The Roth 401(k) and Roth IRA have several key similarities, especially when it comes to their tax advantages.

After-tax contributions

Both Roth 401(k)s and Roth IRAs require after-tax contributions. This is a significant difference from the pre-tax contributions investors typically make to 401(k)s and IRAs. With Roth accounts, you can’t deduct your contributions, nor are they withheld from their paychecks pre-tax.

In the short term, this lack of upfront tax advantage can be impactful. Depending on someone’s income and contribution amount, it may significantly increase the amount someone will pay in income taxes for the year. On the other hand, a traditional IRA account allows someone to deduct their contributions, which can help them reduce their income taxes for the year.

Tax-free growth potential and withdrawals

Though both types of Roth accounts require after-tax contributions, they also allow for tax-free growth potential and qualified withdrawals. You won’t pay income taxes on any investment earnings in the account with a qualified withdrawal. 

Additionally, you can withdraw money from both accounts income tax-free after you turn 59 ½ if the withdrawal is qualified. Practically, this means favorable tax treatment in retirement since you won’t have to pay taxes on the distributions.

Required minimum distributions (RMDs)

RMDs are distributions the IRS requires people to take from their retirement accounts once they reach age 73 (or 72, for those who reached that age before December 31, 2022).¹ If you don’t withdraw the full amount you’re required, you’re on the hook for a tax penalty.

Previously, RMDs applied to all 401(k)s, including Roth accounts. They also applied to traditional IRAs, though not Roth IRAs. However, for tax years 2024 and later, RMDs no longer apply to any Roth accounts, including both IRAs and 401(k)s.

Roth 401(k) vs. Roth IRA: How are they different?

Roth 401(k)s and Roth IRAs also have some important differences. It’s important to understand these differences when choosing which account to use and to ensure you don’t get hit with tax penalties.

Annual contribution limits

One of the biggest differences between the Roth 401(k) and Roth IRA is their annual contribution limits. In 2024, you can contribute up to $23,000 per year — and a catch-up contribution of $7,500 per year if you’re age 50 or over — to a Roth 401(k). However, the annual contribution limit for Roth IRAs is much lower: just $7,000 per year, or $8,000 if you’re 50 years of age or over.

Eligibility criteria

Another big difference between the Roth 401(k) and the Roth IRA is the eligibility criteria. If you make too much money, you can’t open or contribute to a Roth IRA. More specifically, for tax year 2024, you are not eligible for a Roth IRA if your modified adjusted gross income (MAGI) is:

• $161,000 or more if you are single or head of household
• $240,000 or more for married couples filing jointly

With Roth 401(k)s, the only eligibility criteria are that your employer offers this option.

Early withdrawal exceptions and penalties

A final key difference between the Roth 401(k) and Roth IRA is their withdrawal rules. You can only withdraw from your Roth 401(k) once you’ve reached age 59 ½ and it’s been at least five years since your first deposit. Withdrawals can be made without penalty if you become disabled or by a beneficiary after your death. This rule applies to both your contributions and any earnings. Any withdrawals that don’t meet these requirements will result in tax penalties.

In a Roth IRA, the withdrawal rules for your earnings are the same as the rules for a Roth 401(k). However, you can withdraw your contributions tax-free and penalty-free at any time.

For both account types, there are also exceptions when the IRS allows you to withdraw from your account with no tax penalty. Those exceptions include the birth or adoption of a child, a permanent disability, a personal or family emergency, and more.²

Pros and cons of a Roth 401(k)

Pros

• Higher contribution limits: In 2024, you can contribute up to $23,000 to your 401(k) — and the limit is even higher if you’re 50 or older.
• Possibility of an employer match: Many companies offer 401(k) matching contributions, which are essentially free money.
• No income limits: Unlike Roth IRAs, Roth 401(k)s don’t have income limits.

Cons

• Fewer investment options: Most employer plans offer a limited menu of investment options, leaving you with fewer options than a Roth IRA.

Pros and cons of a Roth IRA

Pros

• Wider range of investment options: Roth IRAs can offer a wider range of investment options than 401(k)s — you can choose a broker that offers the investments you want.
• More flexible distribution rules: Roth IRAs have more flexible distribution rules, including allowing you to access your contributions at any time penalty-free.

Read more: The advantages of an IRA

Cons

• Lower contribution limits: The contribution limits of Roth IRAs are considerably lower than those of Roth 401(k)s.
• Income limit for contributions: Roth IRAs have income limits that prevent most high earners from contributing, unless they meet certain exceptions.
• No possibility of employer match: Unlike a Roth 401(k), a Roth IRA is a personal account that doesn’t leave the possibility of an employer match.

Choosing between a Roth 401(k) and a Roth IRA

As with any financial planning, there’s not a one-size-fits-all answer to the question of whether a Roth 401(k) or Roth IRA is right for you. One way to help figure out which account makes more sense for you is to talk to a financial professional about your specific situation, but here are a few scenarios to help guide your conversation.

Roth 401(k) scenarios

A Roth 401(k) might be a good choice if you:

• Earn too much money to open and contribute to a Roth IRA
• Want to take advantage of an employer match
• Want to contribute as much money as possible to the plan account
• Appreciate the ease of signing up at work and having contributions automatically deducted from your pay each pay period

Roth IRA scenarios

A Roth IRA might be a good choice if you:

• Want access to a wider range of investment options.
• Want to be able to withdraw contributions tax and penalty-free before you turn 59½ without making a plan loan.
• Work for an employer that doesn’t offer a Roth option in its 401(k).

Can I have a Roth 401(k) and a Roth IRA?

The good news is you don’t have to choose between a Roth 401(k) and a Roth IRA — you can have both. If you receive a Roth 401(k) through your employer, consider contributing enough to receive your employer match.

Once you’ve earned your entire matching contribution for your Roth 401(k), you may want to consider contributing to a Roth IRA. Because of its more flexible distribution rules and variety of investment options, investors may prefer it to the Roth 401(k).

Read more: Can I contribute to a 401(k) and an IRA?

Next steps

Roth 401(k)s and Roth IRAs can both be good options for retirement savers. The answer to which account is the better option will depend on your unique situation. It’s a good idea to talk to a financial professional to weigh the pros and cons and come up with the best choice for your situation.

Additionally, to get a complete picture of your retirement readiness, you can use Empower’s free online financial tools. These tools can help you form a personalized retirement plan and see how likely you are to meet your goals. And if you’re not on track for your retirement goals, our free financial tools can help you get back on track and determine just how much you should save each month.