401(k) vs Roth IRA: Which is Better? (2025 Comparison)

Both are powerful retirement accounts, but they work in fundamentally different ways.

Understanding these differences can help you save tens of thousands in taxes and build significantly more wealth over your lifetime.

Here's what you need to know about each option and how to think through this decision.

Key Takeaways

• 401(k) = Through employer, pre-tax contributions, $23,000 limit (2025)
• Roth IRA = You open it, after-tax contributions, $7,000 limit (2025)
• A common approach is to prioritize 401(k) match first (employer contribution is essentially free money)
• Common next step: Roth IRA ($7,000/year)
• Then consider maximizing 401(k) ($23,000/year)
• Using both is often beneficial if budget allows (they're complementary, not competitive)

Table of Contents

1. Quick Comparison Table
2. What is a 401(k)?
3. What is a Roth IRA?
4. 401(k) Advantages
5. Roth IRA Advantages
6. Which Should You Choose?
7. When to Choose 401(k) Over Roth IRA
8. When to Choose Roth IRA Over 401(k)
9. Roth 401(k): Best of Both Worlds?
10. Real Example: Comparing 30-Year Results
11. Frequently Asked Questions
12. Test Your Knowledge
13. The Bottom Line

Quick Comparison Table

What is a 401(k)?

A 401(k) is an employer-sponsored retirement account.

How It Works

1. You contribute money pre-tax from each paycheck
2. Employer may match some or all of your contribution (free money!)
3. Money grows tax-deferred (no taxes on gains while invested)
4. You pay taxes when you withdraw in retirement

Example:

• You earn $80,000/year
• Contribute $10,000 to 401(k)
• Taxable income drops to $70,000
• Tax savings at 22% bracket: $2,200
• Employer matches 50% = $5,000 free money
• Total in account: $15,000 from $10,000 contribution

According to Vanguard's 2024 How America Saves report, the average employer match is 4.7% of salary.

401(k) Contribution Limits (2025)

According to the IRS 2025 contribution limits, the annual limits are:

• Employee contribution: $23,000/year
• Catch-up (age 50+): Extra $7,500 ($30,500 total)
• Total with employer match: Up to $69,000/year

Types of 401(k)

Traditional 401(k):

• Pre-tax contributions (lower your taxes now)
• Pay taxes on withdrawals in retirement

Roth 401(k):

• After-tax contributions (no tax break now)
• Tax-free withdrawals in retirement
• Same $23,000 limit as traditional 401(k)

Not all employers offer Roth 401(k). Check with your human resources department.

What is a Roth IRA?

A Roth IRA is an individual retirement account you open yourself (not through employer).

How It Works

1. You contribute after-tax money (you already paid taxes on it)
2. Money grows completely tax-free
3. Withdraw tax-free in retirement (both contributions and earnings)

Example:

• You earn $80,000/year, pay taxes ($17,600 at 22% bracket)
• After-tax income: $62,400
• Contribute $7,000 to Roth IRA
• No tax deduction now
• Grows to $70,000 over 20 years
• Withdraw $70,000 tax-free in retirement ($0 taxes owed)

Roth IRA Contribution Limits (2025)

The IRS sets annual Roth IRA contribution limits based on income:

• Standard contribution: $7,000/year
• Catch-up (age 50+): Extra $1,000 ($8,000 total)
• Income limits:
  • Single filers: Begin phasing out at $146,000, completely phased out at $161,000
  • Married filing jointly: Begin phasing out at $230,000, completely phased out at $240,000

If you earn too much, look into "backdoor Roth IRA."

401(k) Advantages

Advantage 1: Employer Match (Free Money)

Most employers match 50-100% of contributions up to 3-6% of salary.

Example:

• Salary: $100,000
• Employer matches 50% up to 6%
• You contribute: $6,000
• Employer adds: $3,000
• Total: $9,000 in account from your $6,000

That's an instant 50% return. You can't get that anywhere else.

Advantage 2: Much Higher Contribution Limits

$23,000/year vs $7,000/year for Roth IRA.

If you're a high earner who can save aggressively, 401(k) allows you to shelter much more from taxes.

Advantage 3: Immediate Tax Savings

Contributing $20,000 to 401(k) saves $4,400 in taxes at 22% bracket.

That's cash back in your pocket now.

Advantage 4: No Income Limits

Anyone can contribute to 401(k), regardless of income.

Roth IRA cuts off at $161,000-$240,000 depending on filing status.

Roth IRA Advantages

Advantage 1: Tax-Free Withdrawals Forever

You never pay taxes on Roth IRA gains. Ever.

Hypothetical Example:

• Contribute $7,000/year for 30 years = $210,000
• Grows to $830,000 at 8% average annual returns (hypothetical)
• Withdraw $830,000 tax-free

With 401(k), you'd pay $150,000-200,000+ in taxes on that $830,000 (hypothetical calculation).

Advantage 2: No Required Withdrawals

401(k) forces you to start withdrawing at age 73 (Required Minimum Distributions set by the IRS).

Roth IRA has no Required Minimum Distributions (RMDs). Ever. You can leave money growing tax-free and pass it to heirs.

Advantage 3: Withdraw Contributions Anytime

Need money before retirement? You can withdraw your contributions (not earnings) from Roth IRA penalty-free anytime.

Example:

• Contributed $35,000 over 5 years
• Account worth $42,000 ($35,000 contributions + $7,000 gains)
• Can withdraw up to $35,000 penalty-free if needed

With 401(k), you pay 10% penalty + taxes on any withdrawal before 59½.

Advantage 4: More Investment Options

401(k) limits you to 10-30 funds chosen by your employer.

Roth IRA lets you buy any stock, ETF, or mutual fund. Complete freedom.

A 2023 study by the Investment Company Institute found that the average 401(k) plan offers 21 investment options, while Roth IRAs provide access to thousands of individual securities.

Advantage 5: No Required Minimum Distributions (Ever)

You're never forced to withdraw from Roth IRA. It can grow tax-free your entire life and pass to heirs.

401(k) requires withdrawals starting at 73, whether you need money or not. This is especially relevant when planning your net worth trajectory for early retirement.

Which Should You Choose?

Short answer: Using both accounts together often makes sense if your budget allows.

The reality is that 401(k) and Roth IRA aren't competitors—they're complementary tools that work best together. That said, if you need to prioritize your contributions, here's a common framework to consider:

Priority 1: 401(k) Up to Employer Match

Capturing the full employer match first makes mathematical sense. Here's why: it's essentially free money with an immediate 50-100% return you can't get anywhere else.

Example:

• Employer matches 50% up to 6% of salary
• Contributing 6% captures the full match
• This maximizes the employer contribution benefit

Priority 2: Consider Maxing Out Roth IRA ($7,000/year)

Once you've captured your full employer match, the next step many people take is turning their attention to maxing out a Roth IRA.

Why does this approach prioritize Roth IRA over additional 401(k) contributions? A few key reasons:

• Tax-free withdrawals in retirement typically beat tax-deferred growth
• Greater flexibility since you can withdraw contributions penalty-free if needed
• No required minimum distributions—ever
• Complete control over investment choices instead of being limited to your employer's plan options

Priority 3: Consider Maxing Out 401(k) ($23,000/year)

If you have room in your budget to save beyond $7,000 per year after capturing your employer match, a logical next step is to go back to your 401(k) and work toward the full $23,000 contribution limit.

Here's what this might look like for someone earning $120,000/year:

1. First, contribute 6% to 401(k) = $7,200 (captures full employer match)
2. Next, max out Roth IRA = $7,000
3. Then, increase 401(k) contributions to hit the $23,000 annual limit
4. Total retirement savings: $30,000/year (25% of income)

This approach helps you build wealth systematically. Track your retirement account balances to see your progress toward these goals.

Priority 4: Mega Backdoor Roth (Advanced Strategy)

If your employer allows after-tax 401(k) contributions, some high earners use strategies to contribute up to $69,000/year total and convert to Roth.

This is an advanced strategy—consult a tax professional and your 401(k) administrator to see if it's available and appropriate for your situation.

When to Choose 401(k) Over Roth IRA

You're in a High Tax Bracket Now (32%+)

If you're currently earning $200,000+ and expect to be in a lower tax bracket during retirement, focusing more heavily on pre-tax 401(k) contributions often makes sense.

Here's the math:

• Current tax bracket: 35%
• Expected retirement bracket: 22%
• Tax arbitrage opportunity: 13% difference

In this scenario, getting a 35% tax break today and paying 22% later creates a meaningful advantage.

You Want to Maximize Tax-Advantaged Savings

The 401(k) contribution limit ($23,000) is more than three times higher than the Roth IRA limit ($7,000).

If you're able to save $20,000 or more annually for retirement, you'll need to use your 401(k) to shelter that much money from taxes.

You Earn Too Much for Roth IRA

If you earn over $161,000 (single) or $240,000 (married), you can't contribute to Roth IRA directly.

You can still do backdoor Roth IRA (contribute to traditional IRA, convert to Roth).

When to Choose Roth IRA Over 401(k)

You're Young and in a Lower Tax Bracket (12-22%)

If you're early in your career earning between $40,000-$80,000, the Roth IRA becomes particularly attractive.

The logic is straightforward: you're in a relatively low tax bracket now. Paying taxes at today's lower rate and enjoying decades of completely tax-free growth can be more valuable than deferring those taxes. This is especially powerful when combined with smart investing habits.

You Value Flexibility

One underrated advantage of the Roth IRA: you can withdraw your contributions (not earnings) at any time without penalty or taxes.

This makes it a useful option for people who want to save aggressively for retirement but might need access to those funds in an emergency.

You Want More Investment Control

401(k) limits you to plan options (often high-fee funds).

Roth IRA lets you buy any stock or fund.

You Want to Leave Tax-Free Money to Heirs

Roth IRA has no required withdrawals. You can let it grow forever and pass to kids/grandkids tax-free.

Roth 401(k): Best of Both Worlds?

Some employers offer Roth 401(k) option.

Roth 401(k) combines:

• High 401(k) contribution limits ($23,000)
• Roth IRA tax-free withdrawals
• Employer match (but match goes into traditional 401(k), not Roth)

Downsides:

• Required withdrawals at 73 (unlike Roth IRA)
• Less flexibility than Roth IRA

Best for: High earners who want tax-free withdrawals but can't contribute to Roth IRA due to income limits.

Real Example: Comparing 30-Year Results

Person A: Only 401(k)

• Contributes $10,000/year to traditional 401(k) for 30 years
• $3,000/year employer match
• Total contributions: $390,000
• Grows to $1.52 million at 8% returns
• Withdraws in retirement at 22% tax bracket
• After taxes: $1.19 million

Person B: 401(k) Match + Roth IRA

• Contributes $3,000/year to 401(k) (get full match)
• $3,000/year employer match
• Contributes $7,000/year to Roth IRA
• Total contributions: $390,000 (same as Person A)
• 401(k) grows to $570,000 (taxed at 22% = $445,000 after tax)
• Roth IRA grows to $790,000 (tax-free)
• Total after-tax: $1.24 million

Person B wins by $50,000.

Roth IRA's tax-free growth beats 401(k) when contribution amounts are equal.

Note: This example assumes an 8% average annual return. According to the Federal Reserve's 2022 Survey of Consumer Finances, the median retirement account balance for families is significantly lower than optimal, highlighting the importance of maximizing contributions early.

Frequently Asked Questions

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

Yes! They're separate accounts with separate contribution limits.

You can contribute $23,000 to 401(k) AND $7,000 to Roth IRA in the same year ($30,000 total).

Does 401(k) contribution reduce ability to contribute to Roth IRA?

No. They don't affect each other.

401(k) contributions don't count toward Roth IRA limit, and vice versa.

Should I convert 401(k) to Roth IRA?

Maybe, but you'll pay taxes on the conversion.

Good if: You're in low tax bracket now (12-22%) and expect higher in retirement.

Bad if: You're in high bracket now (32%+) and expect lower in retirement.

What if I leave my job?

You can roll 401(k) into IRA (traditional or Roth).

Rolling to Roth triggers taxes on the conversion, but then it grows tax-free forever.

Can I withdraw from 401(k) before 59½?

Yes, but you pay 10% penalty + taxes.

Exceptions (no penalty):

• Rule of 55 (leave job at 55+ can withdraw from that 401(k))
• 72(t) Substantially Equal Periodic Payment (SEPP) withdrawals (complicated, talk to advisor)
• Hardship withdrawals (still owe taxes)

Do I pay taxes on employer match?

Not now. Employer match grows tax-deferred.

You pay taxes when you withdraw in retirement (same as your own 401(k) contributions).

Test Your Knowledge

Think you've got 401(k) vs Roth IRA figured out? Take this quick quiz to test your understanding:

The Bottom Line

The 401(k) vs Roth IRA question isn't really either/or—using both together creates valuable tax diversification if your budget allows.

Here's a common framework to consider:

1. Start by contributing enough to your 401(k) to capture the full employer match
2. Max out your Roth IRA ($7,000/year)
3. Go back and maximize your 401(k) contributions ($23,000/year)
4. If you can save even more, consider a taxable brokerage account

If you can only contribute to one account right now, think through these factors:

• An employer match makes the 401(k) particularly valuable since it's essentially free money
• Without a match, the Roth IRA may be more attractive for those earning under $161,000, thanks to its flexibility and tax-free growth
• Your specific situation—including your current tax bracket, time horizon, and income trajectory—should ultimately guide this decision. Consider consulting a financial advisor for personalized guidance.

Using both accounts together gives you valuable tax diversification: some money gets taxed now (Roth), some gets taxed later (401k). This flexibility can be incredibly valuable in retirement.

The most important thing? Just start. Even $200/month invested in a Roth IRA could grow to approximately $230,000 over 30 years at 8% average annual returns (hypothetical example). The power of compound interest rewards people who start early, regardless of how small their initial contributions might be.

Want to see how your retirement savings compare to others? Check out net worth percentile rankings by age to see where you stand.

If you want to track your retirement accounts and overall net worth automatically, try Guapital free. It syncs your 401(k), IRA, and other investment accounts so you can see your total wealth in one place.

Last updated: November 6, 2025

Disclaimer: This article is for educational purposes only and does not constitute financial advice or tax advice. Consult a qualified financial advisor and tax professional for personalized guidance.