If you are not sure whether to decide between a 401(k) and a Roth IRA, you should know that you can actually go with either. The final decision comes down to your investment timeline. When it comes to selecting between a 401(k) and a Roth IRA, you should know several things about the respective account types so you can make an informed decision.
Read on to learn more.
What is A 401K – An Overview
A 401(k) is essentially sponsored by your employer. This retirement plan often comes with a great benefit regarding the employer match. For instance, if your employer offers a three percent match, it means that if you contribute three percent and your employer contributes three percent too, then you will be getting six percent contributed from your annual salary to your 401(k).
In 2025, 401ks have an annual contribution limit of 23 thousand five hundred dollars. If you are fifty or older, your contribution is seven thousand five hundred dollars. For easy math, you might want to check out this roth vs traditional 401k calculator and analyze the potential growth between each.
If you aren’t good with numbers, Creative Planning can help you get a detailed analysis of your finances so you can make better decisions for your retirement.
Potential Benefit of A 401(k)
When it comes to the benefits of a 401(k), the first pro is your potential employer match. In other words, if your employer offers a match, it means that you are basically getting free money. Another potential benefit of a 401K is the high annual contribution limit. This aspect indicates that you can potentially save more from retirement in any given year.
Lastly, you should know that with a 401(k), your eligibility is not limited by your potential income. However, some 401K accounts have caps, which means that if you make over a certain amount, it will start reducing the amount that you can contribute towards your 401(k) account.
However, with a 401(k), you have a limited investment selection, which is also a potential downside of choosing a 401(k).
What is A Roth IRA – An Overview
The money that you put in a Roth IRA has already been taxed, which means that it can grow tax-free over time. You should know that a 401K is offered by an employer. However, a Roth IRA is opened by you. Compared to 401(k)s, Roth IRAs typically offer more investment selections.
On the other hand, 401K’s have higher contribution limits. The potential benefits of Roth IRAs include the ability to access a large investment selection, tax-free distributions, and easy money withdrawals.
Traditional vs. Roth 401(k) – What is Different
Depending on whether you are in a traditional 401(k) or a Roth 401(k), you will actually get a tax benefit, which is a matter of when. You will be able to choose whether you want to pull money from a tax-free or a tax-deferred account. You can also opt for a combination of the two each year. Leveraging this, you will be able to better manage your taxable income, especially if you have income limits and aren’t able to opt for a Roth IRA.