Use this article to compare a Roth 401(k) and a Roth IRA so you can decide which one fits your retirement savings strategy.
Both Roth 401(k) accounts and Roth individual retirement accounts (IRAs) let you make after-tax retirement contributions. You contribute money that has already been taxed, so your contributions are not tax-deductible in the year you make them.
The main advantage of these accounts is that your contributions grow tax-deferred. With a qualified withdrawal, you also get your earnings tax-free. This is especially helpful if you expect to be in a higher tax bracket during retirement than you are today.
Eligibility rules are different for a Roth 401(k) and a Roth IRA.
You make Roth 401(k) contributions as employee deferrals. They generally follow the same rules as pre-tax deferrals. Eligibility to contribute to a Roth 401(k) is tied to your employment.
You can only contribute to a Roth 401(k) if your employer offers it as part of their retirement plan. You also need to meet eligibility requirements, which are usually based on age or years of service.
The Internal Revenue Service (IRS) does not set income limits for Roth 401(k) contributions.
If you have earned income, you can generally contribute to a Roth IRA, as long as you meet the IRS income limits. The IRS adjusts these income limits each year. They determine whether you can make a full, partial, or no contribution in a given year.
Unlike a Roth 401(k), a Roth IRA is an individual account that is not tied to employer sponsorship.
Use this table to compare the key features of a Roth 401(k) and a Roth IRA.
Feature
Roth 401(k)
Roth IRA
Availability
Employers offer it as part of a 401(k) plan.
Open to anyone who meets the IRS income requirements.
Contribution limits
Higher contribution limits than IRAs. 401(k) limits combine Roth, pre-tax, and certain other plans.
Lower limits than 401(k) accounts. IRA limits combine Roth and traditional contributions.
Contribution method
Direct payroll deductions.
Personal checking or savings account withdrawals.
Income limits
No upper income limits.
Income limits apply. Your modified adjusted gross income (MAGI) determines whether you are eligible to make contributions.
Withdrawal rules
The 401(k) plan sets the rules. You generally cannot take employee deferrals before age 59½, termination of service, or a hardship.
You can take IRA distributions at any time. There are limits on certain types of movement between IRA accounts.
Taxation of distributions
You can always take contributions tax-free and penalty-free. Earnings are tax-free if the distribution is qualified. Distributions are always equal parts contributions (basis) and earnings.
You can always take contributions tax-free and penalty-free. Earnings are tax-free if the distribution is qualified. Specific ordering rules determine what portion of a distribution is contributions (basis) and what is earnings.
5-year measurement timeframe
Specific to the plan. Starts with the first Roth contribution to the plan (deferral, rollover, employer contribution, or conversion).
A single timeframe for all Roth IRAs you have. It starts with the first contribution to any Roth IRA, including conversions.
Qualified distribution events
Age 59½, death, or disability.
Age 59½, death, disability, or a first-time home purchase with a $10,000 lifetime limit.
Required minimum distributions (RMDs)
No RMDs.
No RMDs.
Loans
Your employer's plan may let you borrow from your Roth 401(k) balance.
You cannot take a loan from a Roth IRA.
You can contribute to both accounts in the same year if you're eligible for a Roth 401(k) plan at work and meet the income requirements for a Roth IRA. Since the contribution limits for each are independent, this strategy can help maximize your tax-free retirement savings.
With Gusto Retirement, both our Gusto 401(k) plans and Gusto IRAs let you make Roth contributions.
This information is provided for illustrative purposes only, and is not intended to be taken as investment or tax advice. Consult a qualified tax and financial advisor to determine the appropriate investment strategy, investment, or managed portfolio for you.