Roth IRA vs. Roth 401(k): What’s the Difference?

Although they provide similar tax benefits, many differences separate a Roth IRA vs. a Roth 401(k). We’ll compare and contrast the two plans.

Roth IRAs and Roth 401(k)s both generate tax-free income for retirement. But beyond their apparent similarities, many investors don’t know the differences between a 401(k) and a Roth IRA.

If you can’t decide between a Roth IRA versus a Roth 401(k), fear not. Here, we’ll compare Roth 401(k)s and IRAs, including contribution limits, income restrictions, withdrawals, and investment options. We’ll also discuss how Composer’s automated trading tools can help you enhance your Roth retirement investing strategy.

Is a Roth 401(k) the same as a Roth IRA?

Roth 401(k)s and Roth IRAs share more than a name. These tax-deferred retirement savings accounts both accept post-tax dollars, meaning you pay taxes when you make contributions in exchange for tax-free withdrawals during retirement. Contributions and earnings grow tax-deferred, allowing you to accumulate wealth during your highest-earning years that you can withdraw in retirement without incurring federal or state income taxes.

Excluding their similar tax treatment, Roth IRAs and Roth 401(k)s operate under radically different rules. Factors that set Roth 401(k)s and Roth IRAs apart include the following:

Contribution limits

Roth IRAs and 401(k)s allow only earned income—money you receive from a job or self-employment. This includes wages, tips, bonuses, commissions, and taxable benefits but excludes other common income streams like alimony, child support, Social Security payments, and unemployment benefits.

You can contribute substantially more to a Roth 401(k) than a Roth IRA. Roth 401(k) limits apply to employee and employer contributions, meaning total contributions may not exceed the sum of the two limits.

The IRS sets the contribution limit for IRAs and 401(k)s. Occasionally, the IRS may raise these limits, including any catch-up limits for individuals aged 50 or older. The catch-up provision allows additional contributions over the standard limit.

These were the contribution limits for Roth IRAs and 401(k)s in 2023:

Roth IRA: $6,500 ($7,500 for individuals 50 and older)
Roth 401(k) employee contributions: $22,500 ($30,000 with catch-up)
Roth 401(k) total contributions: $66,000 ($73,500 with catch-up)

In 2024, the contribution limits increased to:

Roth IRA: $7,000 ($8,000 for individuals 50 and older)
Roth 401(k) employee contributions: $23,000 ($30,500 with catch-up)
Roth 401(k) total contributions: $69,000 ($76,500 with catch-up)

Income restrictions

The IRS restricts Roth IRA contributions based on your modified adjusted gross income (MAGI) and tax-filing status. As you earn more income, your contribution limit decreases until it phases out completely.

For married couples filing jointly or qualifying widow(er)s, the 2023 income restrictions were:

MAGI less than $218,000: Normal limit
MAGI between $218,000 and $227,999: Limit decreases
MAGI greater than $228,000: Ineligible for contribution

For singles, heads of household, or married couples filing separately, the 2023 income restrictions were:

MAGI less than $138,000: Normal limit
MAGI between $138,000 and $152,999: Limit decreases
MAGI greater than $153,000: Ineligible for contribution

In 2024, married couples filing jointly and qualifying widow(er)s have the following income restrictions:

MAGI less than $230,000: Normal limit
MAGI between $230,000 and $240,000: Limit decreases
MAGI greater than $240,000: Ineligible for contribution

In 2024, singles, heads of household, and couples filing separately have the following income restrictions:

MAGI less than $146,000: Normal limit
MAGI between $146,000 and $161,000: Limit decreases
MAGI greater than $161,000: Ineligible for contribution

Unlike Roth IRAs, Roth 401(k)s do not limit contributions based on income. Even high-income earners may contribute to a Roth 401(k).

Required minimum distributions (RMDs)

Roth IRAs do not have required minimum distributions (RMDs). With no RMD requirement, you can leave funds in your account indefinitely, allowing more time for capital appreciation.

Roth 401(k)s required RMDs before 2024. The passage of the SECURE 2.0 Act in 2022 removed this rule, meaning you do not need to take RMDs from your Roth 401(k) after 2023.

You may face a 25% penalty if you do not meet your RMD before the tax filing deadline. However, RMDs do not apply if you are still employed and do not own 5% of the company sponsoring your plan.

Investment options

Roth IRAs accept various investment options, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), CDs, money market funds, and index funds. Although you can’t purchase cryptocurrencies in your Roth IRA, the IRS lets you invest in cryptocurrency ETFs.

You can open a Roth self-directed IRA (SDIRA) if you want more investment options. With an SDIRA, you can invest in alternative assets, such as cryptocurrencies, real estate, and commodities.

Unlike Roth IRAs, Roth 401(k)s offer investors relatively few choices. Your plan administrator controls your 401(k) investment options, which are usually limited to diversified mutual funds that vary by expense ratio and risk level.

Composer can help create a symphony (aka investment strategy) that represents a diversified portfolio, similar to your investment choices in a Roth 401(k) or IRA. See how by signing up for a free 14-day trial today.

Withdrawals

You can withdraw contributions from a Roth IRA at any time without paying a penalty or taxes. However, you may pay a 10% early withdrawal penalty and income taxes on earnings if you withdraw before age 59 ½.

Withdrawing earnings incurs no taxes once you reach age 59½ and have held your account for at least five years. In some circumstances, you can withdraw earnings from a Roth IRA early without penalty, such as buying your first home or paying for childbirth costs. Thanks to the SECURE 2.0 Act, participants can withdraw $1,000 annually for emergency expenses without penalty beginning in 2024.

Roth 401(k)s follow the same rules regarding early withdrawals as Roth IRAs. Unlike Roth IRAs, Roth 401(k)s allow you to borrow up to 50% of your account balance or $50,000—whichever is smaller—as a loan. However, the money may count as a taxable distribution if you breach the loan’s terms.

Employer contributions and matches

Roth 401(k)s allow employer matches on employee contributions, giving these plans a distinct advantage over Roth IRAs regarding total compensation. Employers control if and how much they’ll contribute, meaning matching programs can vary widely between companies.

On occasion, employers may match contributions with pre-tax dollars. In this case, employees may pay taxes on this money when they begin taking distributions.

As self-funded retirement plans, Roth IRAs do not allow employer contributions or matching.

Can you have a Roth IRA and 401(k)?

Many individuals invest in both a Roth IRA and 401(k). By investing in both, you can increase your potential gains and grow your retirement nest egg. However, you must still abide by income restrictions, meaning you cannot contribute to a Roth IRA if your income exceeds IRS limits.

Automate your Roth retirement investing with Composer

With Composer, you can use algorithmic trading strategies to empower your Roth retirement savings. By leveraging Composer’s no-code editor, you can create symphonies that automatically rebalance your portfolio so you maintain an equilibrium of risk and potential profit.

Use strategies similar to the ones employed by investing greats like Warren Buffett or Ray Dalio, or try approaches developed by other Composer users.