401k vs Roth IRA: Which Retirement Account Is
A complete comparison of 401k and Roth IRA for US workers — contribution limits, tax treatment, withdrawal rules, and which one to prioritise in 2026.
If you are a US worker trying to save for retirement, the two most important accounts to understand are the 401k (employer-sponsored) and the Roth IRA (individual). Choosing between them — or deciding how to split contributions — can significantly impact your tax bill in retirement.
2026 Contribution Limits
| Account | 2026 Limit | Catch-up (50+) |
|---|---|---|
| 401k (traditional or Roth) | $23,500 | +$7,500 ($31,000 total) |
| Roth IRA | $7,000 | +$1,000 ($8,000 total) |
| IRA (traditional) | $7,000 | +$1,000 ($8,000 total) |
Note: Roth IRA eligibility phases out at MAGI $150,000–$165,000 (single) and $236,000–$246,000 (married filing jointly) in 2026.
Tax Treatment: The Core Difference
| Traditional 401k | Roth IRA | |
|---|---|---|
| Contributions | Pre-tax (reduces taxable income now) | After-tax (no immediate deduction) |
| Growth | Tax-deferred | Tax-free |
| Withdrawals (retirement) | Taxed as ordinary income | Tax-free |
| Required Minimum Distributions | Yes, from age 73 | No |
When to Prioritise 401k
- Your employer offers a match — always contribute at least enough to get the full match first (it is free money).
- You are in a high tax bracket now and expect to be in a lower bracket in retirement.
- You want to maximise current tax savings to invest more now.
When to Prioritise Roth IRA
- You are early in your career — tax rates are likely lower now than they will be in peak earning years.
- You expect tax rates to rise (likely given current US deficit trajectory).
- You want tax-free withdrawals in retirement for maximum flexibility.
- You want to pass wealth to heirs — Roth IRAs have no RMDs.
The Optimal Strategy: Both
Most financial planners recommend this order:
- Contribute to 401k up to the employer match
- Max out Roth IRA ($7,000)
- Return to 401k and increase contributions
- Consider taxable brokerage account for anything beyond that
Early Withdrawal Penalties
Both accounts penalise early withdrawals (before age 59½) with a 10% penalty plus taxes. Roth IRA contributions (not earnings) can be withdrawn penalty-free at any time — making it a flexible emergency fund of last resort.
Use our 401k Calculator to model your retirement savings growth.