Roth 401(k) vs Roth IRA: Should You Have One or Both?

Roth 401(k)s and Roth IRAs offer another way to save for retirement. But does it make sense to have both?
Last updated Oct 8, 2021 | By Roger Wohlner
Man trying to decide

FinanceBuzz is reader-supported. We may receive compensation from the products and services mentioned in this story, but the opinions are the author's own. Compensation may impact where offers appear. We have not included all available products or offers. Learn more about how we make money and our editorial policies.

Individual retirement accounts (IRAs) and 401(k) accounts are both excellent vehicles for saving for retirement. Beyond traditional IRAs and 401(k)s, Roth accounts can be a good option to consider in addition to or instead of traditional retirement savings accounts.

In terms of Roth accounts, should you have a Roth IRA, a Roth 401(k), neither, or both? We will look at these Roth options and provide some information to help you decide based on your situation.

In this article

Roth 401(k) vs. Roth IRA: A quick comparison

Roth 401(k) Roth IRA
Tax on contributions Contributions are after-tax; there is no upfront tax benefit. Contributions are after-tax; there is no upfront tax benefit.
Tax on withdrawals No taxes on withdrawals if certain requirements are met. No taxes on withdrawals if certain requirements are met.
Mandatory withdrawal age Required minimum distributions (RMDs) are required. RMDs are not required.
Early withdrawal penalties Early withdrawal penalties on investment gains under certain circumstances Early withdrawal penalties on investment gains under certain circumstances
Loans Loans may be available No loans available
Income limits No income limits for contributions. Income limits based on marital status
Annual contribution limit (for tax year 2021)
  • $19,500 for those under age 50.
  • $26,000 for those age 50 or over.
  • $6,000 for those under age 50.
  • $7,000 for those age 50 or over.

Roth 401(k): The basics

Roth 401(k) options, also known as designated Roth accounts, are being offered by a growing number of 401(k) plans. Here are some fundamentals regarding how a Roth 401(k) works.

Contributions to a Roth 401(k) are made with after-tax dollars so there’s no reduction in your taxable income during a given year. This is in contrast with contributions to a traditional 401(k) account, which are generally made with pre-tax dollars. This means that you receive a tax benefit for your contributions to a traditional 401(k) in a given year.

However, if certain requirements are met, there are no income taxes on distributions from a Roth 401(k) in retirement, whereas distributions on a traditional 401(k) are subject to state and federal income taxes.

In terms of maximum contributions set by the IRS, the maximum annual Roth 401(k) contribution is equal to the 401(k) contribution limits for 2021. These maximums increase from time to time and the maximum Roth 401(k) contribution will increase accordingly. The limits for 2021 are:

  • $19,500 for those under the age of 50
  • $26,000 for those 50 or over at any point during 2021

Typically, Roth 401(k)s are subject to RMDs that currently begin at 72. But if you are still working, you are not required to take RMDs from your current employer’s 401(k) as long as you are not a 5% or greater owner of the company and your employer has made the appropriate election in the plan documents.

When you make a qualified withdrawal from your Roth 410(k), it’s generally not subject to taxes or early withdrawal penalties. Qualified withdrawals means the account holder has met the following criteria:

  • The account holder is at least age 59 1/2
  • The account holder’s first contribution to the account was made at least five years prior.
  • Withdrawals made because of the disability or death of the account holder. In the latter case, the money would go to their beneficiaries.

If you make a withdrawal before age 59 1/2 and you haven’t met the five-year rule, you’ll be subject to taxes on any gains in the account, though there are no penalties in this case. Withdrawals made before age 59 1/2 and where the five-year rule has not been met will be subject to both taxes and an early withdrawal penalty.

Note your contributions to the account are never taxed, and you can typically take a loan from your Roth 401(k) if your plan allows you to do so.

Roth 401(k) pros

  • No income restrictions limiting contributions
  • Qualified withdrawals are tax-free
  • Loans may be available
  • Contributions grow tax-free
  • Offers tax diversification from traditional retirement accounts

Roth 401(k) cons

  • Subject to RMDs

Roth IRA: The basics

Roth IRAs are one of two IRA types. When compared with a traditional IRA, there are some similarities but also several differences.

Contributions to a Roth IRA are made with after-tax dollars. This is in contrast with contributions to a traditional IRA account, which are generally made with pre-tax dollars and could result in tax savings during a given year. Sometimes, though, the contributions might be made on an after-tax basis. Qualified Roth IRA distributions won't generally be subject to tax in retirement, whereas pre-tax contributions to a traditional IRA will typically be taxed as ordinary income.

Roth IRAs are subject to annual IRA contribution limits which are $6,000 for those under 50 and $7,000 for those over 50 in 2021. These limits change from time to time, and it’s important to note that limits are for total contributions to all IRA types, whether Roth, traditional, or a combination of the two.

Contributions to a Roth IRA are subject to income limitations, and if your income exceeds these limits, you won’t be able to make contributions. For 2021, these income limits are:

Married filing jointly or qualified widow

Modified adjusted gross income (MAGI) < $198,000 $6,000 for those under 50
$7,000 for those over 50 in 2021
MAGI between $198,000 and $208,000 Phased contribution limits
MAGI above $208,000 No contributions allowed


Single filers, head of household, married filing separate (not living with spouse)

MAGI < $125,000 $6,000 for those under 50
$7,000 for those over 50 in 2021

MAGI between $125,000 and $140,000 Phased contribution limits
MAGI above $140,000 No contributions allowed


Married couple, filing separately and lived with spouse at any time during the year

MAGI < $10,000 A reduced amount
MAGI above $10,000 No contributions allowed


Although there are income limits in place for Roth IRAs, you may be able to contribute with a backdoor Roth. A backdoor Roth is a way for those whose income is too high to make a Roth IRA contribution. It involves making an after-tax contribution to a traditional IRA and then converting that money to a Roth IRA.

Whether the conversion is taxable will depend upon whether you have other money in a traditional IRA account.

Unlike with a Roth 401(k) account, there are no RMDs with a Roth IRA and no other withdrawal requirements. Qualified distributions are also tax and penalty-free. For qualified distributions, you must have met the five-year rule since your first Roth IRA contribution and meet one of these requirements:

  • You are at least age 59 1/2
  • The distribution is taken on account of your disability
  • The distribution is taken by your beneficiaries in the event of your death
  • The distribution is to buy or build your first home or that of specified family members up to a $10,000 limit

If you are at least 59 1/2 but have not met the five-year rule, any distributions you take will generally be subject to taxes, but not the 10% withdrawal penalty. However, if you are younger than age 59 1/2, distributions will typically be subject to taxes and penalties, with these exceptions if you have met the five-year rule:

  • The distribution is taken on account of your disability
  • The distribution is taken by your beneficiaries in the event of your death
  • The distribution is to buy or build your first home or that of specified family members up to a $10,000 limit

If you are under age 59 1/2 but have not been contributing to your account for five years, any distributions you take are generally subject to taxes and the penalty. These exceptions could allow you to avoid the penalty but not the taxes:

  • The distribution is taken on account of your disability
  • The distribution is taken by your beneficiaries in the event of your death
  • The distribution is to buy or build your first home or that of specified family members up to a $10,000 limit
  • Unreimbursed medical bills
  • Health insurance premiums if you are unemployed
  • Expenses related to the birth or adoption of a child

Roth IRA pros

  • No RMDs
  • Estate planning benefits under the SECURE Act rules
  • Contributions grow tax-free
  • Offers tax diversification from traditional retirement accounts

Roth IRA cons

  • Income limitations for contributions

How to choose between a Roth 401(k) vs. Roth IRA

If you are wondering whether you should open a Roth 401(k) or a Roth IRA, the answer may be that you don’t have to choose. You can typically contribute to both types of accounts if you are eligible and if your company’s 401(k) plan offers a Roth option. Here are some things to consider.

For those who earn too much to contribute to a Roth IRA, the Roth 401(k) is a great option in that there are no income caps on the ability to contribute.

When choosing between the two, one consideration might be the quality of the investment options available to you in your company’s 401(k) plan. You’ll generally have more options in a Roth IRA account with the custodian or your choosing.

Things to consider in deciding upon either Roth option or a different type of retirement account:

  • Are your current retirement savings mostly in traditional IRA and 401(k) accounts? Could you benefit from the tax diversification offered by a Roth account?
  • Do you expect to be in a higher tax bracket when you retire?
  • Will a Roth account be beneficial as part of your estate planning objectives?

A consideration that might sway the choice towards a Roth 401(k) would be if your employer offers a contribution match. Employer matches are essentially free money and unless your 401(k) plan is exceptionally awful it almost always makes sense to contribute at least enough to earn the full company match. One note about matches to a Roth 401(k), by law these matching contributions need to be made to a traditional 401(k) established in your name.

A Roth IRA and/or a Roth 401(k) can be useful accounts in your overall financial and retirement planning. Roth accounts offer tax diversification as far as your retirement savings when you reach retirement age. The trade-off is giving up a current-year tax benefit offered by the ability to contribute to the traditional 401(k) and the traditional IRA (if your circumstances allow for this) in exchange for the ability to take tax-free withdrawals in retirement.

Another advantage of both types of Roth account is that your contributions, but not account earnings, can generally be withdrawn tax and penalty-free. Although it’s typically not a good idea to make withdrawals if your goal is saving for retirement, it’s nice to know that this is an option if your situation changes and you need the money.

FAQs

Are a Roth 401(k) and a Roth IRA the same type of account?

While a Roth 401(k) and a Roth IRA have some similarities, the two types of accounts also have some important differences. A Roth 401(k) offers higher contribution limits, which can be useful if you want to save a larger amount each year than a Roth IRA allows. With a Roth 401(k), you can contribute up to $19,500 in 2021 if you are under age 50, and with a Roth IRA, the contribution limit is $6,000 if you’re under age 50.

Which is better, a Roth 401(k) or a Roth IRA?

The better account between a Roth 401(k) and a Roth IRA depends upon your goals and your financial situation. For instance, if you are a high income earner, you might appreciate the flexibility of a Roth 401(k) due to the income limitations of a Roth IRA. However, if you prefer more flexibility with your investments, a Roth IRA might be a better option for you.

How much should you contribute to a Roth IRA?

Depending on your situation, it could be a good idea to max out your contributions to your Roth IRA in order to build your retirement nest egg. Doing so each year could potentially put you in a better place when you reach retirement age, though it’s important to note that all investments come with risk.

The bottom line

If you’re wondering whether a Roth 401(k) or a Roth IRA makes the most sense for you, the good news is that though these accounts have their differences, both can be useful components of your retirement plan. This comparison should help you to decide which option is right for you based on your financial situation. A financial advisor might be able to help you decide how to invest money if you still have questions about the best account for you.

Stash Benefits

  • Get $10 to make your first investment
  • Invest in stocks, bonds, and ETFs
  • Fractional shares available
  • Start investing with just $1

Author Details

Roger Wohlner In addition to his bylined articles on sites like TheStreet, ThinkAdvisor, and Investopedia, Roger ghostwrites extensively for financial advisors, investment managers, and financial services companies.