I recently came across a post on X that sparked the idea to get into the differences between the Roth IRA and the Roth 401(k).
Each of these retirement savings vehicles allows someone to pay the tax upfront and upon reaching age 59.5, the funds can be distributed tax-free. Obviously, the tax-free distribution is a very sought after avenue for retirement savings.
If anything, I find that some folks love the certainty they feel around Roth dollars. They know what their balance is and this balance does not have an impending tax liability in the future, such as pre-tax dollars might.
With that, I wanted to highlight some of the differences between a Roth IRA and a Roth 401(k).
Let’s start with the Roth IRA:
Generally speaking, this is an individual retirement account and not offered through an employer. (Although some states can require businesses to run a state sponsored Roth IRA in the event they do not have a qualified plan set up.)
Here are some characteristics of a Roth IRA:
They offer a very wide array of investment options. Very similar to a brokerage account.
They can offer penalty-free distributions of outright contributions. This is a very advantageous liquidity aspect of the Roth IRA.
They are not subject to RMDs during the owner’s lifetime.
The maximum for 2026 is $7,500 or $8,600 for those 50 or older.
There are income limitations to making outright contributions to the Roth IRA. This is something to pay attention to for high earners.
Here are some characteristics of a Roth 401(k):
401(k) plans can allow for loans up to $50,000 if the plan permits.
Roth contributions may be eligible for employer matching contributions.
The Rule of 55, which can allow for those who separate from their employer during or after the year they turn 55 to take penalty-free withdrawals from the 401(k).
They are not subject to RMDs during the owner’s lifetime.
Non-qualified distributions are taxed and penalized on a pro-rated basis. (Basis returned, earnings taxed and penalized.)
The maximum contribution varies and is significantly higher than the Roth IRA.
$24,500 is the standard cap. $32,500 is the cap for those above age 50. $35,750 is the cap for those 60-63. The Mega Backdoor Roth may allow for those under 50 to contribute up to $72,000 and those over 50 to contribute up to $80,000.
Now, the post that sparked this piece mentioned only using the Roth 401(k) rather than the Roth IRA.
But I’d push back on that. Each of these retirement savings vehicles has their own advantages. It doesn’t have to be all or nothing. One can quite simply use both.I’d argue that using both would be more advantageous than only choosing one.
This is for informational purposes only and is not intended as legal, tax, or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.