A 401(k) and a Roth IRA are both retirement accounts, but they work differently. Many people use both.
Where you get them
A 401(k) is offered through an employer. A Roth IRA is opened by you at a brokerage or bank, if you have earned income and your income is below the eligibility limits.
Taxes
Traditional 401(k) contributions reduce your taxable income now, and withdrawals are taxed later. Roth IRA contributions are made with after-tax money, and qualified withdrawals are tax-free. Many plans also offer a Roth 401(k) option.
Contribution limits
Limits are set by the IRS each year and are much higher for a 401(k) than for an IRA. Both allow catch-up contributions for those 50 and older. The calculators use the figures in the tax-year settings.
Employer match
If your employer matches 401(k) contributions, that match is part of your compensation. Many people contribute at least enough to receive the full match before putting money elsewhere.
Flexibility and investment choices
A 401(k) offers the menu chosen by your plan. A Roth IRA usually offers a wider range of investments. Roth IRA contributions (not earnings) can generally be withdrawn without tax or penalty, which gives it more flexibility.
A common order of priorities
- Contribute to the 401(k) up to the full match.
- Fund a Roth IRA if eligible.
- Return to the 401(k) to raise contributions further.
This is a common approach, not advice for your situation. Model both with the 401(k) calculator and the Roth IRA calculator.