When Is Maxing Out Your 401(k) Smarter Than a Roth IRA?

It's important to save for retirement, but most people only have so much money to set aside. If you have to choose between maxing out your 401(k) and contributing to a Roth IRA, how do you decide which is the better choice?

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at the differences between 401(k)s and Roth IRAs. Dan notes that traditional 401(k)s let you exclude income from tax currently, but you have to pay tax on withdrawals in retirement. By contrast, Roth IRAs give you no tax deduction but also charge no tax on retirement withdrawals. Dan suggests looking at your current tax rate, and if it's higher than your tax rate is likely to be in retirement, then maxing out your 401(k) is often the better choice. If it's lower than your rate in retirement will be, then a Roth typically makes more sense.

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  • Report this Comment On July 31, 2014, at 9:30 AM, bdub1126 wrote:


    An important point to consider also is that those eligible to contribute to a 401(k) plan should also factor in the matching contributions from their employer. I agree that a Roth IRA has great benefits but the employer match is free money that should not be sacrificed regardless of the back-end tax savings from a Roth IRA.

    My advice would be to put as much into your 401(k) to get the best match from your employer and then look to put the remainder into a Roth.

  • Report this Comment On July 31, 2014, at 10:06 AM, WickedChicken wrote:

    You don't discuss the sometimes offered Roth 401k. My company offers both traditional and Roth 401ks and on top of that we have the option of using a self-directed brokerage account. So in that case maxing it out is a no-brainer but it was definitely a tough decision choosing between Roth and Traditional. Since we're in a pretty high tax bracket I chose to take advantage of the pre-tax benefits making it a bit easier to put in the full 17k/year.

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Dan Caplinger

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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