Roth IRA vs. Roth 401(k) contributions: ‘It’s power versus freedom,’ advisor says Here’s how to decide the best option for your retirement savings
Roth 401(k) and Roth IRA contributions can provide future tax-free growth
Roth 401(k) or Roth individual retirement account contributions can be a powerful way to build wealth for your golden years.
There's no upfront deduction for deposits with either, but the investment grows tax-free, which means you won't owe taxes on withdrawals in retirement. Plus, there are no required withdrawals for the original account owner.
But when comparing Roth 401(k) versus Roth IRA contributions, there are pros and cons to consider, experts say.
"It's power versus freedom," said certified financial planner Jordan Whitledge, lead advisor at Donaldson Capital Management in Evansville, Indiana.
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While you can defer more into your Roth 401(k), there could be more flexibility with your Roth IRA account, Whitledge said.
"The mistake is thinking it's one or the other," because you can contribute to both accounts, he said.
Still, there are key differences between Roth 401(k) and Roth IRA accounts, experts say. Here's what to know.
Your Roth 401(k) offers 'free money'
When you make Roth 401(k) contributions, you typically receive an employer match, up to a certain percentage of your deferrals. The match could be deposited into your pretax or Roth account, depending on the plan.
That's "essentially free money," said CFP Nathan Sebesta, owner of Access Wealth Strategies in Artesia, New Mexico.
Typically, experts say you should contribute at least up to your 401(k) match before considering savings into other accounts.
The trade-off is that 401(k)s typically have fewer investment choices and higher plan fees in some cases compared with your Roth IRA, Sebesta said.
Defer a 'much higher amount'
Another benefit of Roth 401(k) contributions: There's no income limit, and you have a bigger deferral cap compared with your Roth IRA, according to Whitledge.
"It really comes down to the ability to save a much higher amount," he said.
For 2025, you can defer up to $23,500 into your 401(k), plus an extra $7,500 if you're age 50 and older, known as "catch-up contributions." That catch-up limit is $11,250 for workers aged 60 to 63 in 2025, which brings the max deferral cap to $34,750 for these investors.
By comparison, the Roth IRA contribution limit for 2025 is $7,000, plus an extra $1,000 for investors age 50 and older.
There are also income limits for Roth IRA contributions, which adjust yearly for inflation. But higher earners can bypass the cap via the so-called backdoor Roth strategy.
Your Roth IRA offers flexibility
One of the biggest benefits of Roth IRAs is flexibility, experts say.
You can withdraw Roth IRA contributions — but not growth — anytime without paying an IRS penalty. Generally, earnings withdrawn before age 59½ are subject to a 10% penalty, with some exceptions.
By contrast, you can only tap your 401(k) penalty-free under certain scenarios, assuming your plan allows it. You may also have access to limited 401(k) loans, which come with specific payback guidelines.
"You can't necessarily take contributions out of the Roth 401(k)," said Whitledge. "That's why you're able to compound a lot more, a lot quicker."
This story originally appeared on: CNBC - Author:Kate Dore, CFP®, EA
