401(k) vs Roth IRA: Which Retirement Account Should You Choose?

The decision between a 401(k) and a Roth IRA is not about which account is better. It is about which one fits your current income, your expected future income, and your tax strategy. Most people benefit from using both, but if you can only contribute to one right now, here is how to decide.

The Core Difference: When You Pay Taxes

The fundamental distinction between these accounts comes down to timing. A traditional 401(k) gives you a tax break today. You contribute pre-tax dollars, which lowers your taxable income this year. You pay taxes later when you withdraw the money in retirement. A Roth IRA works in reverse. You contribute after-tax dollars today, meaning no immediate tax break. But in retirement, every dollar you withdraw—including all growth—is completely tax-free.

This is not a minor detail. It is the single most important factor in determining which account makes sense for you. If you expect to be in a higher tax bracket in retirement than you are now, the Roth IRA wins. If you expect to be in a lower tax bracket in retirement, the traditional 401(k) wins. The challenge is that predicting your future tax bracket requires making assumptions about your career trajectory, future tax law, and retirement lifestyle.

Contribution Limits and Employer Matching

For 2026, the contribution limit for a 401(k) is $23,500 if you are under 50, or $31,000 if you are 50 or older. The Roth IRA limit is much lower: $7,000 if you are under 50, or $8,000 if you are 50 or older. If you are trying to save aggressively for retirement, the 401(k) allows you to shelter far more money from taxes each year.

But here is the critical advantage of the 401(k): employer matching. If your employer offers a match—say, 50% of your contributions up to 6% of your salary—that is free money. A $50,000 salary with a 6% contribution and a 50% match means you contribute $3,000 and your employer adds $1,500. That is an instant 50% return on your money, which no investment can guarantee. If your employer offers a match, you should always contribute enough to get the full match before putting money anywhere else.

The Roth IRA has no employer match because it is an individual account, not an employer-sponsored plan. You open it yourself through a brokerage like Vanguard, Fidelity, or Schwab. This gives you complete control over your investment choices, but it also means you are responsible for setting it up and funding it.

Income Limits and Access Rules

The Roth IRA has income restrictions. For 2026, if you are single and earn more than $161,000, you cannot contribute directly to a Roth IRA. If you are married filing jointly and earn more than $240,000, you are also phased out. High earners can still access a Roth IRA through a backdoor Roth conversion, but that adds complexity.

The 401(k) has no income limits. Anyone with access to an employer-sponsored plan can contribute, regardless of how much they earn. This makes the 401(k) the default retirement vehicle for high earners who are locked out of the Roth IRA.

Another key difference is access to your money. With a Roth IRA, you can withdraw your contributions (not earnings) at any time, tax-free and penalty-free, because you already paid taxes on that money. This makes the Roth IRA a flexible option if you want to build retirement savings but also want access to your contributions in an emergency. With a 401(k), withdrawing money before age 59½ typically triggers a 10% penalty plus income taxes, unless you qualify for specific exceptions.

Tax Strategy: The 22% Bracket Crossover

If you are currently in the 12% federal tax bracket or lower, the Roth IRA is almost always the better choice. You are paying a low tax rate now to lock in tax-free growth forever. If you expect your income to rise over your career, you are essentially locking in today's low rate and avoiding higher rates later.

If you are in the 22% bracket or higher, the traditional 401(k) starts to make more sense. You are getting a meaningful tax deduction today, and most retirees drop into a lower bracket once they stop working. If you retire and live on $60,000 per year, you will likely be in the 12% or 15% bracket, meaning you saved 22% or more on contributions and only pay 12-15% on withdrawals.

The break-even point is roughly the 22% bracket. If you are right at that threshold, the decision becomes more personal. Do you value the certainty of tax-free withdrawals in retirement (Roth IRA), or do you want the immediate tax savings and the ability to contribute more (401(k))? There is no universally correct answer.

Investment Options and Fees

A 401(k) is only as good as the plan your employer offers. Some plans have excellent low-cost index funds with expense ratios under 0.10%. Others are filled with high-fee actively managed funds that eat into your returns. You are stuck with whatever your employer provides. If your 401(k) has poor investment options and high fees, it can cost you tens of thousands of dollars over a career.

A Roth IRA gives you complete freedom. You can invest in individual stocks, bonds, ETFs, mutual funds, or even alternative assets depending on your brokerage. You can choose funds with expense ratios as low as 0.03%. You control everything. This flexibility is one of the Roth IRA's biggest advantages, especially if your employer's 401(k) plan is subpar.

Required Minimum Distributions (RMDs)

Starting at age 73 (as of 2026), traditional 401(k) accounts require you to take Required Minimum Distributions (RMDs). The IRS forces you to withdraw a percentage of your account each year and pay taxes on it, whether you need the money or not. If you have a large 401(k) balance, RMDs can push you into a higher tax bracket in retirement and increase your Medicare premiums.

Roth IRAs have no RMDs during your lifetime. You can leave the money invested for as long as you want, let it grow tax-free, and pass it on to heirs. This makes the Roth IRA a powerful estate planning tool. If you do not need the money in retirement and want to maximize what you leave behind, the Roth IRA is superior.

The Hybrid Strategy: Use Both

Most financial planners recommend a combination of both accounts if you can afford it. Here is a common approach:

Step 1: Contribute enough to your 401(k) to get the full employer match. This is free money and should always be your first priority.

Step 2: Max out your Roth IRA ($7,000 or $8,000 depending on age). This gives you tax-free growth and flexibility.

Step 3: If you still have money to save, go back to your 401(k) and contribute more, up to the annual limit of $23,500 or $31,000.

This strategy gives you tax diversification. In retirement, you can withdraw from your 401(k) up to the top of a low tax bracket, then pull the rest from your Roth IRA tax-free. This minimizes your tax bill and gives you control over your taxable income.

Special Case: Roth 401(k)

Some employers offer a Roth 401(k), which combines features of both accounts. You contribute after-tax dollars (like a Roth IRA), but you get the higher contribution limits of a 401(k) ($23,500 or $31,000). Withdrawals in retirement are tax-free, just like a Roth IRA. The Roth 401(k) is an excellent option if you are in a low tax bracket now but expect to earn significantly more later, or if you are a high earner who is phased out of the Roth IRA.

One downside: Roth 401(k) accounts are subject to RMDs at age 73, unlike Roth IRAs. However, you can roll a Roth 401(k) into a Roth IRA after leaving your employer, which eliminates the RMD requirement.

The Bottom Line

If you are early in your career and in a low tax bracket, prioritize the Roth IRA. You are locking in a low tax rate and building a tax-free nest egg. If you are in a high tax bracket and expect to retire in a lower one, prioritize the traditional 401(k) to maximize your tax savings today. If your employer offers a match, always contribute enough to get the full match first, regardless of which account you prefer.

The best strategy for most people is to use both. Get the employer match in your 401(k), max out your Roth IRA, then go back to the 401(k) if you have more to save. This gives you flexibility in retirement and protects you from future tax law changes. The goal is not to pick the perfect account. The goal is to save consistently, invest wisely, and let compound growth do the heavy lifting.