You can achieve financial independence with either a Roth IRA or a traditional 401(k). Many even choose to take advantage of both vehicles and their respective tax benefits. But if I had to choose one to prioritize, the Roth IRA makes a ton of sense -- even for high-income earners.
Here's how a Roth IRA can unlock a tax-free, hassle-free retirement.
Tax rates are set to rise in 2026
Since the passage of the Tax Cuts and Jobs Act of 2017, personal tax rates for individuals have remained relatively low on a historical basis. The act's provisions around income tax are set to "sunset," or expire, at the end of 2025, meaning tax rates are set to rise across income levels in 2026. For financial planning purposes, this is important to know: Voluntarily declaring income now makes sense relative to declaring it later, all else equal.
Instead of taking a tax deduction to fund a 401(k) today, declaring income in the current year makes it available for deposit to a Roth IRA. If you expect taxes to rise in the future, you can take advantage of lower tax rates today and enjoy the Roth IRA's tax-free status for the rest of your life (assuming you hold the account open for at least five years). It's also entirely possible that tax rates rise more than expected in the future, which would further amplify the benefits of a Roth IRA today.
401(k)s carry embedded tax liabilities
When you look at a Roth IRA account balance, you know the money is entirely yours -- forever. This is an unusual (and significant) benefit, since you'll need to be an active tax manager if you hold a 401(k) or a regular taxable brokerage account. Distributions from traditional 401(k) accounts are taxable at your highest income tax rate, while taxable brokerage accounts will generate different sorts of income depending on the investments you hold (here I refer to capital gains, interest, and dividends).
If you're working with a pre-tax 401(k) in retirement, you'll need to consider the impact to your tax return when you take money out of your account. Any amounts withdrawn (sometimes in the form of required minimum distributions, or RMDs) are added to your gross income and taxed at your ordinary rate. In other words, a pre-tax 401(k) is not all yours, and it often works out that anywhere from 10% to 50% of the account may end up as tax expense. This depends on a variety of factors, but you'll need to consider that 401(k)s leave you with a deferred tax liability that will need to be carefully managed in retirement.
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Good for investor psychology
A Roth IRA can provide a version of psychological freedom that most investment accounts don't provide. Knowing the account is entirely yours -- and will be forever -- can help you feel a greater sense of freedom and can help you streamline your financial planning. Not having to consider taxes ever again saves paperwork and time spent accounting, and helps keep management easy.
Roth IRAs also come with achievable maximum contribution limits: In 2022, you're able to contribute $6,000 to a Roth IRA ($7,000 if you're over 50). Needless to say, maxing out a Roth IRA is a fairly manageable goal for most focused investors. If you earn too much money to contribute directly to a Roth IRA, you can also consider making a backdoor Roth IRA contribution, which will help you end up in the same place as if you were able to make a direct contribution.
Open a Roth IRA today
Even though the optimal choice is to maintain both a 401(k) and a Roth IRA (and max out contributions for as many years as you can), it isn't always possible to find the money to contribute to both accounts. If you're in the position of needing to prioritize one account over the other, it's hard to argue with the long-run benefits of a Roth IRA. Better yet, Roth IRAs are free to open and offer a much wider range of investment choices than do most 401(k) plans.
A zero tax liability for the rest of your life is not something to take for granted. Focus on making incremental contributions and do your best to max out your Roth IRA every year.
