The Advantages of Roth IRA vs 401(k)

by Justin Johnson

If you want to sustain a quality lifestyle after leaving the workforce, you'll need to save for your retirement. There are a variety of tax-advantaged options available, some that you invest in on your own, and others sponsored by employers. The Roth IRA and the 401k are two popular options when saving for retirement. Both options are legitimate investment vehicles and present distinct advantages.

Tax Free Withdrawals

The rules pertaining to Roth IRA's require you to pay tax on money at the time it is deposited into the account, which provides for the advantage of withdrawing money tax free after the age of 59 1/2. If tax rates increase over time, you will enjoy a substantial advantage, since you paid the tax on the deposit when tax rates were lower. 401k accounts allow you to deposit money pretax; however, withdrawals against the account are taxed. If you expect to be in a lower tax bracket after retirement, the 401k may be a better investment.

Investment Flexibility

The Roth IRA has a distinct advantage over the 401k plan when it comes to flexibility of investments. With few exceptions you can invest your IRA in just about anything outside of "collectables" like antiques and art. 401k plans generally offer a narrower selection of of investments for you to choose from. However, investing your IRA may take more planning and research than investing your 401k.

Contribution Limits

401k plans have an advantage over Roth IRA's in regards to contributions limits. The 2011 contribution limits for 401k plans are $16,500 per person under age 49 and $22,000 per person over age 50. If you are a highly compensated employee with a salary of $110,000 per year or more, your contribution limit can be no more than 125 percent of the average contribution percentage of non-highly compensated employees in your plan. The 2011 contribution limits for Roth IRAs are only $5,000 per person under age 49 and $6,000 per person over age 50. Roth contributions begin to phase out for individuals making $107,000 and couples filing jointly making $169,000 and are totally disallowed for individuals making $122,000 or more and couples making $179,000 or more.

Employer Match

Many employers match a percentage of 401k contributions up to a certain point. This is like your employer giving you extra salary that you won't pay taxes on until you retire and on which you will earn additional investment income tax deferred. Your Roth IRA will be funded with your own money and only up to the limits allowed, however, if you are a savvy investor you may be able to maximize your earnings in a way you couldn't with a 401k's less flexible options.


There are no restrictions -- as there are with a traditional IRA -- on opening a Roth IRA if you are covered by a 401k at work. If your adjusted gross income falls under the allowable limits and you can afford it, a strategy to consider is to contribute to both a 401k with your employer and a Roth IRA on your own. They each provide different tax advantages and different ways to save for retirement that can complement each other over the long term.

About the Author

A southeastern Ohio native, Justin Johnson is a finance professional with accounting and financial planning experience in various manufacturing industries. He discovered a love for writing as student at Pensacola Christian College and after learning many lessons in the workplace, he enjoys writing business and finance pieces.

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