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Roth IRA Vs. 401(k): Differences, Pros & Cons

Updated: Apr. 27, 2022By: Kent Thune

Many investors use both a Roth IRA and a 401(k) to save for retirement. But what is the difference between a Roth IRA and a 401(k)? Here's what to know.

401k ira roth on pieces of paper. Retirement planning.

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Difference Between a Roth IRA and a 401(k)

The primary difference between a Roth IRA and 401(k) is that IRAs are individual retirement accounts established by an investor and 401(k)s are retirement benefits sponsored by an employer on behalf of its employees. Other differences may include tax treatment, rules for withdrawal, and maximum contributions.

Comparing a Roth IRA vs 401(k), the main differences are:

Feature Roth IRA 401(k)
Established By Individual Employer, for the benefit of employees.
Income Limits

2022 income limits for modified AGI married filing jointly is $214,000 and $144,000 for single filers.

No income limit to make contributions.
Max Contributions $6,000 for 2022, plus "catch up" contribution of $1,000 for individuals age 50 or over. $20,500 for 2022, plus "catch up" contribution of $6,500 for employees age 50 or over.
RMDs: Required Minimum Distributions No requirement to start taking distributions while owner is alive. Distributions must begin no later than age 72, unless still working and not a 5% owner.
Employer Contributions No matching or other employer contributions. Employer may make matching or other contributions.
Investment Choices No limitations, depending upon brokerage. Typically limited to specific mutual funds selected by investment committee.
Loans Loans not offered. Some plans offer loans, usually for a minimum of $1,000 and maximum of 50% vested balance.

Note: Many 401(k) plans offer Roth after-tax contributions, in addition to the traditional pre-tax contributions. For example, if a 401(k) plan allows for Roth designated contributions, and an employee chooses to make this type of elective deferral, these contributions receive the same tax treatment as a Roth IRA, such as after-tax contributions and tax-free withdrawals after certain IRS-set qualifications are met. However, the Roth 401(k) contributions allow for higher limits (up to $27,000 including catch-up contributions, in 2022) compared to the Roth IRA.


A 401(k) is an employer-sponsored, defined-contribution, retirement savings plan. 401(k) plans have unique features and benefits, such as high contribution limits, automatic payroll deductions, and potential for employer matching contributions.

  • Contributing to a 401(k): Once an individual meets a 401(k) plan's initial eligibility requirements, they may choose a contribution amount, usually as a percentage of gross pay. Contributions can be made through automatic payroll deduction.
  • Investment Options: After choosing their contribution amount, a participant may choose investments, which is typically a set of 8-12 mutual funds. Most 401(k) plans don't offer investment options beyond the select list of mutual funds.
  • Taxes: Traditional 401(k) contributions go in on a pre-tax basis. Withdrawals at retirement are taxed as income at the individual's federal income tax rate. State income taxes also apply, where applicable. Roth 401(k) contributions, if available, go in on an after-tax basis. All contribution types grow tax-free.
  • Limitations: There are no income limits for making 401(k) contributions. However, contributions are limited to a maximum of $20,500 per year, plus an additional $6,500 for individuals age 50 and up.
  • Early Withdrawals: 401(k) early withdrawals may be allowed for hardship reasons but the individual must generally pay a 10% early withdrawal penalty for withdrawals made before age 59 1/2.
  • Employer Matching: Employers may make matching contributions, which typically adheres to a certain formula, such as 50% of employee deferrals, not exceeding 3% of employee income. For example, to receive the full employer match in this case, the employee would need to contribute 6% of their pay.
  • Fees: 401(k) plans typically charge fees, which may range from 0.5% to 2.0%, depending upon the size of the employer and the size of the plan's assets and number of employees. These fees may be charged to the plan trust and thus, not clearly evident to the 401(k) participant.


  • Convenience: 401(k) contributions are automatically made through payroll on a periodic basis.
  • Transferability: After terminating employment, a 401(k) participant may choose to transfer their account's balance into an IRA or they may transfer it to a new employer's 401(k) plan, if applicable, without any tax consequences.
  • Tax advantages: accounts grow tax-free and traditional, pre-tax contributions reduce taxable income.
  • Dollar-cost averaging: contributions are invested periodically, which helps to average the cost, and the market risk of investments, lower over time.
  • Compound interest: Interest, dividends, and capital gains from investments in a 401(k) stay in the account and "compound" to grow the account faster over time compared to regular deposit accounts.
  • High contribution limits: The maximum annual contribution is $20,500 for 2022. By comparison, the maximum contribution for an IRA in 2022 is $6,500 per year.
  • Shelter from creditors: The Employee Retirement Income Security Act of 1974, or ERISA, protects 401(k) accounts from claims from creditors.
  • Possibility of employer contributions: Employers may make matching contributions, which work like a bonus on top of the account owner's contributions.
  • Hardship withdrawals and loans: Under certain qualifying conditions, a 401(k) participant may make a hardship withdrawal from their account balance. Some 401(k) plans offer loans.


  • Limited investment selection: 401(k) participants typically can only choose from a pre-selected set of investment choices, which are usually mutual funds.
  • Lack of control: Although the vested account balance belongs to the participant, plans generally don't allow withdrawals, unless certain qualifying conditions are met.
  • Potential for high fees: Some plans have administrative fees and investment costs that are higher than other investment accounts, such as IRAs.
  • Early withdrawal penalty: Withdrawals from a 401(k) before age 59 1/2, will generally incur a 10% early withdrawal penalty from the IRS.

Roth IRAs

A Roth IRA is an individual retirement account that is funded with after-tax dollars. Investments in a Roth IRA grow tax-free while held in the account and Roth IRA withdrawals are generally tax-free if taken at or after age 59 1/2. This differs from a traditional IRA, which is funded with pre-tax dollars and withdrawals are taxed as income.

  • Contributing to a Roth: Roth IRA contributions are set up by the individual account owner at their chosen brokerage firm and are made on an after-tax basis.
  • Taxes: Money held grows tax-free and withdrawals are generally tax-free if made at or after age 59 1/2.
  • Limitations: Income limitations for a Roth IRA in 2022 are $214,000 for married filing jointly and $144,000 for single filers.
  • Early Withdrawals: Withdrawals made prior to age 59 1/2 will generally incur a 10% early withdrawal penalty from the IRS.
  • Employer Matching: Since a Roth IRA is a retirement account established and maintained by an individual, there are no employer matching contributions to a Roth.
  • Fees: Many discount brokerages allow for free account setup. However, expense ratios from mutual funds and ETFs still generally apply. If an investor chooses to open a Roth IRA with a full service broker, the investor may pay commissions and similar fees to the broker or advisor.
  • Investment Options: Depending upon the brokerage where the account is held, a Roth IRA potentially has unlimited investment options, including stocks, bonds, mutual funds, ETFs, and options.


  • Tax-free growth of contributions: There are no taxes on interest or capital gains while money is held in a Roth IRA.

  • Tax-free withdrawals of principal at any time: Since contributions are made on an after-tax basis, these contributions may be withdrawn free of tax. However, interest and capital gains are taxed if withdrawn from a Roth IRA.
  • Tax-free withdrawals at retirement: Withdrawals taken at or after age 59 1/2 are generally tax-free.
  • No required minimum distributions (RMDs): Unlike traditional IRAs, Roth IRA account holders are not required to make minimum distributions at any age.


  • No tax deduction: Roth contributions are made on an after-tax basis, which means they won't reduce taxable income.
  • Income limits: Married individuals filing a joint tax return with income over $214,000 and single filers with income over $144,000 cannot make Roth contributions, under 2022 rules.
  • Contribution limits: Roth contributions in 2022 are limited to $6,000 per year for age 50 and under and $7,000 for age 50 and over.
  • 5-year rule on withdrawals: To avoid the 10% early withdrawal penalty, in addition to the 59 1/2 age requirement, a Roth IRA must be open for at least five years.

Traditional IRA vs. Roth IRA vs. Roth 401(k) vs. 401(k)

The key difference between a traditional IRA vs Roth IRA is that traditional contributions are made on a pre-tax basis and Roth contributions are made on an after-tax basis. Withdrawals from a traditional IRA are taxed as income, whereas qualifying Roth IRA withdrawals made at retirement are tax-free.

The same differences between traditional and Roth IRAs apply to the traditional 401(k) vs Roth 401(k). Traditional 401(k) contributions are pre-tax and withdrawals at retirement are taxed as income. Roth 401(k) contributions are after-tax and qualifying withdrawals at retirement are tax-free.

Tips When Choosing How To Invest for Retirement

General guidelines for retirement saving are that individuals should contribute at least enough to a 401(k) plan to receive the full employer match, if applicable. In some cases, it can make sense to use an IRA in addition to a 401(k). Investment selection and traditional vs Roth contributions will depend on a range of factors, including age and income.

Considerations for choosing how to save and invest for retirement are:

  • Take advantage of a match: If an employer offers a match, it's almost like free money. If a budget allows, it's generally wise to contribute at least enough to receive the full employer match.
  • Consider an IRA: If a 401(k) is not available, investors may consider taking advantage of an IRA for retirement savings. Some investors use an IRA, either to add a Roth option when one isn't available in a 401(k), to expand the investment options, or to maximize annual contributions, if applicable.
  • Maximize contributions when possible: For those retirement savers who are fortunate enough, and when the budget allows, contributing up to the annual allowed amount will maximize retirement savings.
  • Invest for risk tolerance and time horizon: When it comes to the investments, the primary determining factors are tolerance for risk (the ups and downs) and time horizon (the number of years until withdrawals begin).

Bottom Line

The key difference between a Roth IRA and a 401(k) is that a Roth IRA is an account established by an individual and a 401(k) is a benefit established by an employer for the benefit of its employees. From there, the main differences remaining revolve around income limits, contribution limits, and withdrawal rules.

This article was written by

Kent Thune profile picture
Kent Thune, CFP®, is a fiduciary investment advisor specializing in tactical asset allocation and portfolio management with a focus on ETFs and sector investing. Mr. Thune has 25 years of wealth management experience and has navigated clients through four bear markets and some of the most challenging economic environments in history. As a writer, Kent's articles have been seen on multiple investing and finance websites, including Seeking Alpha, Kiplinger, MarketWatch, The Motley Fool, Yahoo Finance, and The Balance. Mr. Thune's registered investment advisory firm is headquartered in Hilton Head Island, SC where he serves clients all around the United States. When not writing or advising clients, Kent spends time with his wife and two sons, plays guitar, or works on his philosophy book that he plans to publish in 2024.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (7)

jwill53 profile picture
Glad you posted this article. Question for discussion; Let's say your current contributions spin off $1000/month in distributions and you are not yet 59 1/2. Can you take those distributions and classify them as return of principle up to the amount you have contributed to your Roth without penalty. I am starting to direct more funds to my Roth in lieu of my supplemental income brokerage account and am trying to figure out if I can take a montly distribution tax-free.
Kent Thune profile picture
@jwill53 Excellent question. I'm not allowed to provide advice in this space but I can certainly answer your question with general rules. If you take $1,000/month in "distributions," you'd generally owe the 10% early withdrawal penalty prior to age 59 1/2. However, investors are allowed to withdraw principal (the amount of original contributions) free of tax or penalty. This is because those contributions come from after-tax dollars and thus, will not be taxed again. For example, if your Roth IRA balance is $50,000 and $36,000 of that represents original contributions (thus, $14,000 represents gains) an investor could withdraw $1,000/month for three years (12,000/year for three years = $36,000) free of penalty. To answer more directly, investors don't have a choice of classifying distributions or income from dividends how they see fit; however, they can generally withdraw the principal of a Roth IRA penalty-free. I hope that helps!
jwill53 profile picture
@Kent Thune that was my line of thinking - but you hit on one if the issues that i see as possibley being problematic, how/who determines the classification of the withdrawal and decides whether it is a withdrawal of principle or gains?
Kent Thune profile picture
@jwill53 That's a perfect question for your brokerage firm. I say this because brokerages tend to have varying procedures in this regard and you don't want to make a mistake. In many cases, it is the responsibility of the account owner (you) to keep records. In different words, in the event your are audited, you'll need records showing that your withdrawals were equal to or lower than the principal amount invested. You'll also want to watch for the 5-year rule on Roth account aging. Again, this is purely education and not advice. I believe your best route to take is a call to your broker, which hopefully doesn't take long! Many brokers are currently under-staffed and over-worked from tax season.
break the bank profile picture
Good artickle, but like most it fails to address the ultimate outcome, and which is the better option. So not fall back into the every account is different BS.
Let's say your 25, and take the most aggressive approach in both accounts, and to keep it simple you invest $6k a year. One limits you a dozen choices the other unlimited. One you pay the taxes up front the other at the end. So 40yrs later your 65. What's the account balance difference and which one burns through fastest after taxes?
Kent Thune profile picture
@break the bank Great points! The article content was intended to outline the primary difference between a Roth IRA and a 401(k), while providing the key features of each. Our educational content is informational and does not provide advice. With that said, the primary deciding factor between after-tax Roth contributions and pre-tax 401(k) contributions is this: Choose a traditional IRA if you expect to be in a lower tax bracket when you retire or a Roth IRA if you believe you will be in a higher tax bracket when you retire. For more details, look at our article on Roth vs Traditional, which was referenced in this article. Here's a link for your convenience: seekingalpha.com/...
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