Roth IRA vs. 401(k): Which Retirement Plan is Right for You?

Planning for retirement can feel overwhelming, especially when choosing between a Roth IRA and a 401(k). Both options offer unique benefits, but selecting the right one depends on your financial goals, income level, and tax preferences. In this guide, we’ll break down the differences between a Roth IRA and a 401(k), helping you make an informed decision about your future.

What is a Roth IRA?

A Roth IRA is an individual retirement account funded with after-tax dollars. This means you won’t get an immediate tax deduction, but your contributions grow tax-free, and qualified withdrawals in retirement are not taxed.

Key Features of a Roth IRA:

1. Tax Advantages: Pay taxes now, enjoy tax-free income later.

2. Contribution Limits: $7,000 annually (or $8,000 if you’re 50 or older) for 2024. Source: IRS

3. Income Restrictions: Eligibility phases out at higher income levels ($146,000 for single filers in 2024). Source: IRS

4. Flexibility: You can withdraw contributions (but not earnings) at any time without penalty.

What is a 401(k)?

A 401(k) is an employer-sponsored retirement plan that allows employees to contribute pre-tax income, reducing your taxable income today. Many employers also match contributions up to a certain percentage, which is essentially free money for your retirement savings.

Key Features of a 401(k):

1. Tax Advantages: Contributions lower your taxable income now; withdrawals are taxed later.

2. Higher Contribution Limits: $23,000 annually in 2024 (or $30,000 if you’re 50 or older). Learn more about the 2025 contribution limits here.

3. Employer Match: Boosts your savings without extra effort.

4. Required Minimum Distributions (RMDs): Mandatory withdrawals starting at age 73.

Roth IRA vs. 401(k): Side-by-Side Comparison

Tax Treatment Contributions taxed, withdrawals tax-free Contributions pre-tax, withdrawals taxed Contribution Limit $6,500 ($7,500 for 50+) $23,000 ($30,000 for 50+) Employer Match Not available Often available Income Restrictions Yes No Investment Control Wide range of options Limited to employer offerings RMDs None Yes, starting at age 73

• Tax Treatment: In most cases Roth IRA contributions are assumed to have already been taxed. In this case your contributions are allowed to grow tax free along with your withdrawals. A traditional 401k however the contributions are assumed to be pre-tax and you will likely pay taxes on your withdrawals in retirement.

• Contribution Limit: As of 2024 you are limited to contributing $7,000 to a Roth IRA ($8,000 if over the age of 50). In 2025 you are limited to contributing $23,500 in a 401k. If you are over the age of 50 you can contribute an additional $7,500.

• Employer Match: Roth IRAs are not entitled to a match while 401ks usually have a match.

• Income Restrictions: Your income can determine whether or not you are allowed to invest in a Roth IRA. A 401k does not have an income limit restriction. Please speak with a financial advisor and your CPA to determine if you are eligible for a Roth IRA.

• Investment Control: While both investment strategies have a wide range of investment options you can argue that Roth IRAs have a little bit more to offer especially if you are interested in private investments or interval funds.

• RMDs: Roth IRAs currently do not have an RMD while a 401k does.

How to Decide Between a Roth IRA and 401(k)

Choosing between a Roth IRA and a 401(k) often comes down to these factors:

1. Current Tax Bracket:

   • If you’re in a lower tax bracket now, a Roth IRA might make sense since you’ll pay taxes upfront at a lower rate.

   • If you’re in a higher tax bracket, a 401(k) allows you to defer taxes until retirement when your income (and tax rate) might be lower.

2. Employer Match:
   Always contribute enough to your 401(k) to get the full employer match—it’s free money! After that, consider a Roth IRA for tax diversification.

3. Flexibility and Investment Choices:
   A Roth IRA offers more investment options and greater flexibility for withdrawals, making it ideal for self-directed investors.

4. Income Level:
   High earners may not qualify for a Roth IRA but can still contribute to a 401(k). Alternatively, consider a backdoor Roth IRA if your income exceeds limits.

Can You Have Both?

Yes! Combining a Roth IRA and a 401(k) can provide the best of both worlds. Potential immediate tax savings with your 401(k) and tax-free income in retirement with a Roth IRA.

Final Thoughts

The Roth IRA vs. 401(k) debate doesn’t have a one-size-fits-all answer. It’s essential to assess your current financial situation, retirement goals, and tax strategy to choose the right plan for you. By understanding the strengths of each option, you can take confident steps toward securing a financially sound retirement.

If you're still unsure, consider speaking with a financial advisor to create a tailored retirement savings plan.

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Disclosure

IntelliVest Wealth Management is a Registered Investment Advisor Headquartered in Spartanburg South Carolina. This is not a solicitation. Please consult with IntelliVest Wealth Management about your personal financial situation.