Traditional Retirement Accounts or Roth? How to Choose
Let’s compare traditional IRAs, traditional 401(k)s, Roth IRAs and Roth 401(k)s. Which might work best for you could depend on your income and tax status.
![A woman stands at a fork in a path, contemplating which way to go.](jpg/xwpug2e3izyxamqdzh5bxr-415-80.jpg)
![Rich Guerrini](jpg/zuv779izdngiu435zfwaqg.jpg)
When it comes to funding your retirement, there may be no more popular solution than the standard employer-sponsored 401(k). But that’s not the only option for putting your earned income to work for post-career life. A Roth IRA or Roth 401(k) could make sense based on your age, income and financial need.
There’s no disputing the potential power of contributing to a 401(k) plan as a path toward a financially stable retirement. Employer-sponsored plans offer generous contribution limits and potential “free money” in the form of employer match programs. But Roth IRAs and Roth 401(k)s can also be effective and tax-advantaged options for investors willing to pay the taxes upfront.
Roth IRAs were codified in 1998, and Roth 401(k)s followed eight years later. The primary benefit of Roth retirement accounts is that all earnings within the account grow and can be withdrawn tax-free, as opposed to a standard 401(k), where withdrawals are taxed as income. The Roth account options can be particularly attractive to younger investors and people who anticipate retiring in a higher tax bracket than the one they are currently in.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](png/hwgj7osrmtuwhk5koevme7-320-81.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
A Roth IRA differs from a traditional 401(k) in a few key ways. In addition to post-tax withdrawals, Roth accounts are subject to more strict annual contribution limits and income restrictions than standard 401(k)s. Key features and limitations of a Roth IRA include:
- Annual contribution limits of $7,000 in 2024 ($8,000 if you’re over the age of 50)
- Available only to investors with an adjusted gross income of $146,000 (single filer) or $240,000 (married filing jointly) or less in 2024
- No required minimum distributions (RMDs) during your lifetime
- Available to be drawn on at any time — although if you withdraw before age 59½, you can withdraw only what you have contributed, not any interest earnings
Roth products can be particularly beneficial to younger investors because — like any market-based investment — the sooner you begin investing, the more opportunity you have to earn compound interest on your contributions over time.
Also — due to IRS regulations intended to prevent highly compensated employees from outsized tax benefits — as investors earn higher incomes in their mid-to-late career, they limit or eliminate their ability to contribute to a Roth IRA.
Investing in a Roth 401(k)
That limitation, however, does not exist with a Roth 401(k), making it a potentially attractive option for high-earners or participants looking to make contributions that would exceed the annual contribution limit of an IRA.
Much like a Roth IRA, a Roth 401(k) offers tax-free growth on earnings and withdrawals as contributions are made after-tax. There are a few specific differences in the two accounts, though. One primary difference is that a Roth 401(k) is sponsored and managed by your employer, which can limit who can contribute. Many employers are adding a Roth 401(k) option to their benefits package, but it may be unavailable to some. In addition to availability, a Roth 401(k) differs from a Roth IRA in that:
- It is employer-managed, meaning less control over how its funds are invested
- Employers may contribute matching funds
- Contributions are not subject to income limits
- There is a required minimum distribution beginning at age 75 (for those born after 1960)
Which option is best?
With so many options available — traditional 401(k), traditional IRA, Roth 401(k) and Roth IRA — which is the right choice for you? The answer lies in evaluating the advantages and limitations of each option.
In reality, investors shouldn’t look at Roth or traditional retirement accounts as an either/or proposition. Depending on your income needs and life stage, contributing to both can be an effective strategy. Your personal finances are unique, and your retirement saving plan should likewise be unique to you. A financial adviser can help you determine an account and contribution strategy that is tax-advantaged and best fits your long-term needs.
Related Content
![Rich Guerrini](jpg/zuv779izdngiu435zfwaqg.jpg)
Rich Guerrini is the President and Chief Executive Officer of PNC Investments. In his role, he is responsible for all sales, operations, risk and compliance activities for the retail investments organization. Prior to his current responsibilities, Guerrini was Executive Vice President and Managing Director of Alternative Investments for PNC Investments and was responsible for development and rollout of the PNC Investment Center and PNC’s web-based investment offering.
-
Is 100 the New 70?
Eating well, exercising, getting plenty of sleep and managing chronic stress can help make you a SuperAger. Funding that long life requires longevity literacy.
By Phil Wright, Certified Fund Specialist Published
-
Nine Lessons to Be Learned From the Hilton Family Trust Contest
Disclaimers, good communication, post-marital agreements and more could help avoid conflict in a family after the owners of a wealthy estate pass away.
By John M. Goralka Published
-
Is 100 the New 70?
Eating well, exercising, getting plenty of sleep and managing chronic stress can help make you a SuperAger. Funding that long life requires longevity literacy.
By Phil Wright, Certified Fund Specialist Published
-
Nine Lessons to Be Learned From the Hilton Family Trust Contest
Disclaimers, good communication, post-marital agreements and more could help avoid conflict in a family after the owners of a wealthy estate pass away.
By John M. Goralka Published
-
Strategies to Optimize Your Social Security Benefits
To maximize what you can collect, it’s crucial to know when you can file, how delaying filing affects your checks and the income limit if you’re still working.
By Jason “JB” Beckett Published
-
Don’t Forget to Update Beneficiaries After a Gray Divorce
Some states automatically revoke a former spouse as a beneficiary on some accounts. Waivers can be used, too. Best not to leave it up to your state, though.
By Andrew Hatherley, CDFA®, CRPC® Published
-
What’s the Difference Between a CPA and a Tax Planner?
CPAs do the important number crunching for tax preparation and filing, but tax planners look at the big picture and come up with tax-saving strategies.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
Charitable Remainder Trust: The Stretch IRA Alternative
The SECURE Act killed the stretch IRA, but a properly constructed charitable remainder trust can deliver similar benefits, with some caveats.
By Brandon Mather, CFP®, CEPA, ChFEBC® Published
-
How Did O.J. Simpson Avoid Paying the Brown and Goldman Families?
And now that he’s died, will the families of Nicole Brown Simpson and Ron Goldman be able to collect on the 1997 civil judgment?
By John M. Goralka Published
-
What Happens Financially When You Work One More Year?
The impact of saving more, spending less later and benefiting from an extra year or more of compounding can be truly staggering.
By Andrew Rosen, CFP®, CEP Published