2 Reasons a Roth IRA Is Better Than a Roth 401(k) -- and 3 Reasons It's Not

Roth accounts offer tax-free withdrawals in retirement, and that makes them extremely popular with those looking to reduce their future tax liability. In the past, those who wanted Roth savings generally had to stick with an IRA, but the Roth 401(k) has surged in popularity in recent years with 90% of all 401(k) plans now offering this option.

You might think these plans are more or less the same as a Roth IRA, but that's not true. They both have distinct pros and cons that could influence which is a better fit for you. Here's a look at some of the key differences between the two options to help you decide where to put your savings.

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Two ways a Roth IRA is better than a Roth 401(k)

Here are a few advantages Roth IRAs have over Roth 401(k)s:

1. More flexible investment options

Roth 401(k)s usually limit you to a handful of mutual funds that your employer selects. These aren't always bad choices, but they could be for some. Unfortunately, there's not a lot you can do to change this, other than to request that your employer add more investment options.

Roth IRAs give you a lot more freedom to invest your savings how you'd like. You can choose from mutual funds and index funds, like a Roth 401(k) would offer. But you can also invest in individual stocks or bonds if you choose. This flexibility makes it easier to determine how much you pay in fees, too. So you may wish to stash some of your savings in a Roth IRA first if you prefer more control over your investments.

2. Tax-free withdrawals of contributions

Roth IRAs permit you to withdraw your contributions tax- and penalty-free at any time. However, you cannot do this with your earnings (or with Roth IRA conversions). This is a nice option to have if you need to tap some of your savings in a pinch, although doing this will hurt the growth of your retirement account.

Roth 401(k)s do not allow you to withdraw your contributions tax-free if you're under 59 1/2. In this case, your withdrawals are proportional to the amount of contributions and earnings you have. For example, if you have $10,000 in your Roth 401(k) and $2,000 of that comes from earnings, your earnings ratio would be 20%. If you wanted to withdraw $1,000 from your Roth 401(k), 20% or $200 of that would be considered earnings and you could owe taxes and a 10% early withdrawal penalty on that amount. The remainder would be tax-free since the other 80% of your funds came from contributions.

Three reasons a Roth IRA isn't better than a Roth 401(k)

Here are a few drawbacks of the Roth IRA that are worth keeping in mind as well:

1. Low contribution limits

In 2024, you can only contribute up to $7,000 to a Roth IRA if you're under 50 or $8,000 if you're 50 or older. This is far less than the $23,000 and $30,500 that you can contribute, respectively, to a 401(k) in 2024. Those hoping to add a lot of Roth savings this year will likely need to keep at least some cash in a Roth 401(k).

2. Income limits

Roth IRAs have income limits that restrict high earners from directly contributing to these accounts. The following table outlines how much you can contribute to a Roth IRA in 2024 based on your income and tax filing status:

Data source: IRS.

Roth 401(k)s don't have these income restrictions. This makes them a great alternative for high earners who want some Roth savings without jumping through the hoops necessary to open a backdoor Roth IRA.

3. No employer match

Roth 401(k)s plans can offer an employer match, where your employer typically matches 50% to 100% of each dollar you contribute up to 3% to 6% of your salary (each plan sets its own rules). Unfortunately, since a Roth IRA is an individual retirement plan, there's no match option.

It's worth noting that just because a company can offer a Roth 401(k) match doesn't mean they have to. Also, employer-matched funds don't have to be made with after-tax dollars. Up until 2024, all employers made pre-tax matching contributions to Roth 401(k)s. Roth matching contributions just became an option this year, but your employer may not do this.

The best place for your Roth retirement savings depends on your retirement goals and investment strategy. It might be optimal for you to take advantage of both accounts. Weigh all your options before deciding where to put your money this year.