Should I invest in 401k or Roth IRA? The answer depends on your income, your tax bracket now versus retirement, and whether your employer offers matching contributions. Both accounts can help you build wealth for the future, but they work differently. Understanding when to choose one over the other — or when to use both — can make a big difference in your retirement income.
Your Retirement Savings Options
You have multiple ways to save for retirement. Here is a quick rundown of the most common options:
401k (traditional or Roth)
What it is: A 401k is a retirement plan through your employer and the money you save typically comes straight out of your paycheck.
How it works: Most 401ks are traditional. With a traditional 401k, your contributions are pre-tax which lowers your taxable income now, but withdrawals in retirement are taxed. Some employers also enable you to contribute to a Roth 401k. With a Roth 401k, your contributions are after-tax. So, there is no tax break today, but withdrawals in retirement are tax free.
IRA (traditional or Roth)
What it is: An individual retirement account you open yourself (separate from work).
How it works: You can choose to save into a Roth IRA or a traditional IRA. With a traditional IRA, contributions may be tax-deductible now, but withdrawals in retirement are taxed. Contributions into a Roth IRA are after-tax, withdrawals in retirement are tax-free.
HSA (Health Savings Account)
What it is: An HSA is a savings account for people with high-deductible health plans. The money is for are mainly for healthcare expenses, but many people use it as a highly tax-efficient way to save for retirement.
How it works: HSAs have a triple tax advantage — contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. After age 65, you can also use it like a traditional IRA for non-medical expenses (regular taxes apply).
Is 401k Better Than Roth IRA?
There’s no one-size-fits-all answer — it depends on your situation.
A 401k often shines if your employer offers a strong match or if you want to save more than a Roth IRA allows. Contributions are made pre-tax, lowering your taxable income today. Payroll deductions make saving automatic. The tradeoff? Withdrawals are taxed in retirement, and you’ll face required minimum distributions.
A Roth IRA can be the smarter play if you expect higher taxes down the road. Contributions are after-tax, so there’s no upfront break, but withdrawals in retirement are tax-free. That flexibility can be valuable when you’re managing taxable income later in life.
Should I Choose Roth IRA or 401k First?
If you have a 401k with a match, start there. The match is free money — a guaranteed return — and can significantly boost your savings. After you’ve captured the full match, consider directing additional dollars into a Roth IRA. That way, you get both upfront tax benefits and future tax-free withdrawals.
If your employer doesn’t offer a match, a Roth IRA may be the better first step, especially for younger savers with decades of compounding ahead.
401k or Roth IRA for Beginners
Beginners often find it easier to start with a 401k because contributions are automatic and sometimes matched. This builds savings without requiring you to open a separate account. Over time, adding a Roth IRA can provide tax diversification. The combination allows you to control taxable income in retirement and adapt to changes in tax laws.
Using the Boldin retirement planning tool can help you run side-by-side projections for both accounts.
When to Invest in Roth IRA Over 401k
IA Roth IRA may be the better choice if you:
- Expect your tax rate to be higher in retirement.
- Want flexible investment choices beyond your employer’s plan.
- Value tax-free withdrawals for long-term planning.
For example, a young professional earning $60,000 today may benefit from paying taxes now and enjoying tax-free withdrawals decades later. Plus, Roth IRAs allow you to withdraw contributions (not earnings) anytime without penalty — offering a built-in safety net that 401ks don’t provide.
Is It Worth Having Both 401k and Roth IRA?
For many savers, the answer is yes. A 401k lets you save more and capture an employer match, while a Roth IRA offers tax-free withdrawals and flexible investment options. Together, they give you a balanced tax strategy — allowing you to choose which account to draw from in retirement depending on your tax situation.
Avoiding Common Mistakes
A few pitfalls to watch for:
- Putting everything in one account type. Diversifying between Roth and traditional accounts gives you more flexibility later.
- Not contributing enough to get your 401k match. That’s leaving free money on the table.
- Ignoring Roth IRA income limits. High earners may be phased out and risk penalties for excess contributions.
For more unbiased information on retirement accounts, see the SEC’s guide to retirement plans.
Discover Which Account is Right for You
It’s not about choosing the “perfect” account. It’s about building a mix of retirement savings that gives you flexibility, confidence, and control over your future. Use the Boldin Retirement Planner to run scenarios and compare retirement outcomes and tax savings with different options.
FAQs: Should I Invest in 401k or Roth IRA
A: Always contribute enough to get the full 401k match first. Then consider a Roth IRA for tax-free growth.
A: If you expect higher taxes in retirement, a Roth IRA’s tax-free withdrawals may be more valuable. It also offers more investment flexibility.
A: Yes. Using both provides higher total savings potential and a mix of tax benefits, giving you more control in retirement.
A: Beginners often start with a 401k for the simplicity of payroll deductions and possible employer match, then add a Roth IRA for diversification.