A Roth 401(k) and a Roth IRA sound similar — and they are.

Contributions are made after taxes — meaning your taxable income isn’t reduced by the amount of your contributions when you file your taxes. But you get a tremendous tax advantage down the road, since earnings can be taken out tax-free starting at age 59½.

Roth IRA vs. Roth 401(k): How they compare

The Roth 401(k) has a number of key differences from the Roth IRA. Here’s what to know before deciding which account is right for you.

1. Contribution limits

The most distinguishing characteristic of 401(k)s, whether Roth or traditional, is the high contribution limit. In 2023, the 401(k) contribution limit is $22,500 with a $30,000 maximum for workers age 50 and older, Contribution limits for IRAs are $6,500 in 2023, with a $7,500 maximum for workers ages 50 and older.

In 2024, employees may contribute up to $23,000 in their 401(k)s. For workers over age 50, the ceiling will become $30,500.

Meanwhile, annual IRA contribution limits will rise to $7,000 in 2024, while workers over 50 years old will be allowed to contribute up to $8,000 per year.

2. Distributions

One benefit of the Roth IRA is that the account can exist, essentially, forever without any  required minimum distributions (RMDs). There is no requirement to start taking withdrawals while the account holder is living.

Should the account holder pass away, a spouse who inherits the Roth IRA won’t be required to take distributions or pay taxes. Anyone other than the spouse who is listed as a beneficiary will, however, be required to withdraw a minimum amount each year.

A Roth 401(k) has a required minimum distribution beginning at age 73, but starting in 2024, the minimum distribution requirement will be eliminated entirely for Roth 401(k)s thanks to the SECURE Act 2.0, which was passed at the end of 2022. Previously, Roth 401(k) account holders could roll their plans into a Roth IRA and avoid the requirement entirely.

3. Employer matching

Besides high contribution limits, Roth 401(k)s have another advantage — the worker’s contributions can be matched by the employer up to a certain percentage. It’s essentially free money from the employer, on top of the employee’s elective deferrals.

However, if you are contributing to a Roth 401(k), your employer’s match will likely be placed into a traditional 401(k) rather than the Roth account. This will likely change in the future as the SECURE Act 2.0 now allows employers to provide matches in the Roth 401(k) account, but it may take some time for employers to start offering this feature.

4. Investment options

A Roth IRA allows investors a great deal more control over their accounts than a Roth 401(k). With a Roth IRA, investors can choose from the entire universe of investments, including individual stocks, bonds and funds. In a 401(k) plan they are limited to the funds their employer plan offers.

Depending on their plan’s investment menu, employees might be better off maximizing the match from their employer and then funneling extra retirement dollars into a Roth IRA. That way they can take advantage of better investment options if the fund lineup is too limited in the employer’s plan.

Also check the expense ratios of the funds in your Roth 401(k) plan. The lower the expense ratio, the more the fund’s return goes to you instead of the fund manager. Investors paid an average of 0.37 percent for their mutual funds and exchange-traded funds in 2022, according to Morningstar’s most recent data. If the funds in your 401(k) plan run higher than 1 percent and you’ve maxed out any employer match, strongly consider investing in a Roth IRA.

5. Income limits

There are income limitations for Roth IRA contributions. If your modified adjusted gross income in 2023 is $228,000 or more for married couples filing jointly or $153,000 or more for single filers, the accounts are off-limits. However, you still have the option of getting a backdoor Roth IRA — completely legally.

There are no income limits on Roth 401(k)s.To contribute to a Roth IRA in 2024, your adjusted gross income can’t exceed $240,000 for married couples filing jointly or $161,000 for single filers.

6. Rules for early withdrawals

Withdrawals from both Roth 401(k)s and Roth IRAs are tax-free if they meet certain criteria:

  • The accounts must be held for at least five years.
  • The account holder reaches age 59½, or distributions are made in the event of disability or death.

With a Roth IRA, you can always take out the money you contributed without tax repercussions. But with a Roth 401(k), if you want to withdraw money early, you may end up paying a 10 percent penalty tax on any earnings taken out, but not on your contribution amounts. Otherwise, to access your 401(k) funds without tax, you generally would have to take out a loan with the Roth 401(k), if the plan permits.

With a Roth IRA, you can withdraw up to $10,000 to buy, build or rebuild a first home and avoid paying taxes and the 10 percent early withdrawal penalty even if you are under age 59½. You can also take out money for qualified educational expenses while avoiding taxes and penalties.

(Here are some other ways to take penalty-free withdrawals from your retirement accounts.)

Can you have a Roth IRA and a Roth 401(k)?

It is possible to have both a Roth IRA and a Roth 401(k) at the same time. However, keep in mind that a Roth 401(k) must be offered by your employer in order to participate. Meanwhile, anyone with earned income (or any spouse whose partner has earned income) can open an IRA, given the stated income limits.

If you don’t have enough money to max out contributions to both accounts, experts recommend maxing out the Roth 401(k) first to receive the benefit of a full employer match.

Roth IRA or Roth 401(k): Which is better?

Determining which account will best suit your needs depends on your current and future financial situations, as well as your own specific goals.

High earners who want to make contributions to retirement accounts each year should consider a Roth 401(k), because they have no income caps. Additionally, individuals who want to make large contributions can put more than three times the amount in a Roth 401(k) as in a Roth IRA.

Those who want more flexibility with their funds, including more investment options, might lean toward a Roth IRA. This would be especially helpful if you want to leave the account to an heir. But Roth 401(k) accounts can be rolled over into a Roth IRA later in life anyway, though that’s less necessary with the recent SECURE Act 2.0 changes.

Bottom line

Both the Roth 401(k) and Roth IRA are great tools to help you save for retirement. As long as you can avoid making early withdrawals, you’ll be able to take out money tax free during retirement and beyond. Make sure to understand the slight differences between the two options so you can determine the right savings balance for your financial situation.