Last Updated on May 29, 2023
- Contributions to a 401(k) are tax deductible and reduce your taxable income before taxes are withheld from your paycheck.
- Retirement distributions from 401(k)s are taxed at ordinary income tax rates.
- A traditional IRA account allows individuals to contribute pre-tax or after-tax dollars towards investments that can grow tax-deferred.
- A Roth IRA has no tax deduction for contributions, but contributions can be withdrawn tax free in retirement.
Roth IRA Contribution Limits
The annual contribution limits are much smaller with Roth IRA accounts than for 401(k)s. For 2023, the maximum annual contribution for a Roth IRA is:
Individuals with a tax filing status of single can make a full contribution if their annual income is less than $138,000. Contribution amounts are reduced (phased out) if your income ranges from $138,000 to $153,000. If you earned $153,000 or more, you can’t contribute anything to a Roth IRA.
Compare 401k to Roth 401k
- A Roth 401(k) uses after-tax contributions, and withdrawals are tax-free. Traditional 401(k)s allow pre-tax contributions and taxable withdrawals.
- Roth 401(k)s are better if you believe you will be paying a higher tax rate in retirement than you pay now, while traditional 401(k)s are better if you believe you will pay a lower tax rate in retirement than you pay now.
- A traditional 401(k) has the advantage of more options later on, but a Roth may be the smarter choice for big savers.
Compare IRA, Roth IRA
- With a Roth IRA, you contribute after-tax dollars, your money grows tax-free, and you can generally make tax- and penalty-free withdrawals after age 59.5.
- With a traditional IRA, you contribute pre- or after-tax dollars, your money grows tax-deferred, and withdrawals are taxed as current income after age 59.5.
- Contributions to traditional IRAs are tax-deductible, but withdrawals in retirement are taxable.
- With a Roth IRA, you can leave the money in for as long as you want, letting it grow as you get older.
- With a traditional IRA, you must start withdrawing the money by the time you reach age 70.5.
- With a Roth IRA, you pay taxes today in exchange for keeping your savings and earnings tax-free in the future.