Taxes — the mere mention of the word often evokes a collective groan. Yet, buried within the complexities of the U.S. tax code are incentives designed to boost your retirement savings, and these perks are accessible to more than just the affluent.

Retirement vehicles like 401(k)s and individual retirement accounts (IRAs) are popular primarily due to their tax advantages. When weighing options such as a Roth IRA versus a 401(k), it’s crucial to grasp the distinct regulations governing each to optimize your retirement strategy.

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What’s a Roth IRA?

To understand how a Roth IRA works, let’s compare it to a traditional IRA.

A traditional IRA is a tax-advantaged savings account designed to help you save for retirement. This account gives you an up-front tax benefit. Generally, you can deduct the amount you contribute — up to annual limits — from your taxable income. For example, if you contribute $5,000 to a traditional IRA in a year, you can reduce your taxable income by that amount, lowering your tax due. But when you withdraw money, the IRS taxes these distributions — your original contribution and earnings — as ordinary income.

Conversely, a Roth IRA provides a significant tax benefit on the backend. You’ll use after-tax dollars to fund this account, so you don’t immediately get a tax deduction. But your money grows tax-free, and qualified withdrawals in retirement (including earnings) are also tax-free.

So, traditional IRAs offer tax-deferred growth, while Roth accounts provide tax-free growth. And they both share the feature of letting earnings grow without annual taxation (much like most annuities).

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What’s a 401k?

A 401(k) is a workplace retirement plan that employees pay into, and sometimes employers match employee contributions.

For a traditional 401(k), the money is deducted from your paycheck before income taxes are removed from your earnings. For example — all else equal — if you earn $5,000 in a period and elect to have 3% of your pay invested in your 401(k), you’ll only pay taxes on $4,850 ($5,000 minus 3%, or $150). And for a Roth 401(k), your contributions are made after-tax.

In traditional 401(k)s, contributions and earnings grow tax-deferred until you make a withdrawal, typically in retirement. And for a Roth 401(k), you’re allowed to make tax-free withdrawals if IRS rules are met.

Not all employers offer 401(k)s, so your ability to open one really depends on your employer.

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Roth IRA vs. traditional 401(k): 10 key differences

Below is a quick overview of the differences between these accounts as well as an elaboration on each difference. We’ve focused on traditional 401(k)s rather than Roth 401(k)s since the former is much more common in the United States.

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1. Contribution limits

For 2024 and 2025 tax years, the maximum you can contribute to all your IRAs combined — both traditional and Roth — is $7,000. If you’re 50 or older, you can contribute an extra $1,000 as a catch-up contribution, bringing your total limit to $8,000.

401(k) plans have much higher limits. In 2025, you can contribute up to $23,500 from your paycheck. If you're 50 or older, you can contribute an extra $7,500, increasing your personal contribution limit to $31,000.

If your employer also contributes to your 401(k), the total combined contribution (employee and employer) is capped at $70,000 if you're under 50, and $77,500 if you’re 50+.

2. Income limits

Roth accounts have income restrictions. The IRS uses something called modified adjusted gross income (MAGI) to determine how much you can contribute:

• For 2025, if you’re single, you can contribute the full amount if you earn less than $150,000. Contributions start to phase out between $150,000 and $165,000, and if you earn more than $165,000, you can’t contribute to a Roth IRA.
• If you’re married filing jointly, you can contribute fully if your household income is under $236,000. Contributions phase out between $236,000 and $246,000, and at $246,000 or more, you can’t contribute.

401(k) plans have no income limits — you can contribute regardless of how much you earn.

3. Employer match

There’s no employer matching for Roth IRAs.

Many employers match 401(k) contributions, meaning they contribute money to your account when you contribute. However, total contributions (your money and the employer’s contributions) can’t exceed $70,000 in 2025 (or $77,500 if you’re 50+).

4. Automatic payroll deduction

For a Roth IRA, you must contribute manually, as employers don’t deduct Roth IRA contributions from your paycheck.

With 401(k)s, contributions are automatically deducted from your paycheck before taxes are taken out, which makes saving effortless and lowers your taxable income.

5. Withdrawals

Roth IRAs allow for tax-free, penalty-free withdrawals of contributions at any age. If you withdraw the earnings portion of your investment before age 59½, you may owe taxes and a 10% penalty, unless an exception applies.

For 401(k)s, an early withdrawal penalty applies if you withdraw before age 59½, again — unless an exception applies.

6. Required minimum distributions (RMDs)

Roth IRA owners don’t have to withdraw money at any time — but beneficiaries must follow the contract’s withdrawal rules.

If you have a 401(k), you must start taking withdrawals (RMDs) at age 73, even if you don’t need the money.

7. Average fees

Roth IRAs typically have low fees, depending on the financial institution. Many wave account maintenance fees, and investment options often have low-cost expense ratios.

401(k)s often have higher fees, including administrative fees (about 0.5–2.0% of your account balance) and fund management fees.

8. Upfront tax break

You don’t get an upfront tax break with a Roth IRA, because contributions are made with after-tax dollars. But your withdrawals are tax-free in retirement.

A 401(k) reduces your taxable income right away because you contribute to it with pre-tax dollars.

9. Investment choices

You can create your “best” Roth IRA account by investing in almost anything — stocks, bonds, ETFs, mutual funds, CDs — which gives you more flexibility.

With 401(k)s, investment options are limited to what your employer’s plan offers, which is usually a mix of index and mutual funds.

10. Maintenance

A Roth IRA is a self-directed account you control and manage (you can also work with a financial professional). And your employer or a third-party administrator manages a 401(k), meaning you have less control over investment options and fees, but there’s also less work to do on your end.

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Should you have a Roth IRA or 401k?

If your employer offers a 401(k), it’s one of the best ways to build wealth for retirement (aside from annuities) — especially if your employer offers contribution matching. That’s essentially free money, and not taking advantage of it is like leaving part of your paycheck on the table. You could try and hit the maximum contribution to your 401(k) and then look into adopting other investment strategies, like annuities and IRAs. That way, you get the best of both worlds.

If your employer doesn’t offer one, the answer is simple: Open a Roth IRA. It gives you more control over your investments, it has fewer fees, and there are no required minimum distributions. If you still have extra funds to invest after maxing out your IRA, look into brokerage accounts, annuities, and even real estate to further grow your wealth.

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This communication is for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice.