Should I Choose a 401(k) or a Roth IRA?
Understand the core difference between traditional 401(k) and Roth IRA, when each type wins financially, and the right answer for most people in their 30s.
The Core Difference in One Sentence
A traditional 401(k) gives you a tax break today — contributions reduce your current taxable income — but you pay taxes when you withdraw money in retirement. A Roth IRA gives you no tax break today — contributions come from after-tax income — but withdrawals in retirement are completely tax-free.
Both accounts let your money grow tax-deferred (or tax-free in the Roth case) over decades. The real difference is when the government gets its share: now or later. If you expect your tax rate in retirement to be higher than your current rate, Roth wins. If your current rate is higher than your expected retirement rate, traditional wins.
The 2024 contribution limit for a 401(k) is $23,000 ($30,500 if you are 50 or older). The limit for a Roth IRA is $7,000 ($8,000 if 50 or older), with income phase-outs beginning at $146,000 for single filers and $230,000 for married couples filing jointly.
When a Traditional 401(k) Wins
The traditional 401(k) is more beneficial when your current marginal tax rate is high and you expect to be in a lower bracket in retirement. If you are earning significant income at the peak of your career and contributing to a 401(k) reduces your taxes at 32% or 35%, but you expect to withdraw at 22% in retirement, the traditional account wins mathematically.
Traditional 401(k) contributions also help when you need to reduce your current taxable income for other reasons — for example, to stay under an income threshold for a particular deduction, credit, or benefit. The pre-tax contribution directly reduces your AGI in the current year.
For high earners, the traditional 401(k) is often the only tax-advantaged option available at all, since Roth IRA contributions phase out at higher income levels. High earners above the Roth income limit can still use a traditional 401(k) and in some cases execute a backdoor Roth conversion, but the immediate pre-tax benefit of the 401(k) is straightforward.
When a Roth IRA Wins
The Roth IRA is more beneficial when you are in a lower tax bracket now than you expect to be in retirement, or when you expect tax rates overall to be higher in the future. Early-career workers in the 10% or 12% brackets often benefit significantly from paying taxes now at those low rates and enjoying tax-free growth for 30 or 40 years.
Roth accounts also offer unique flexibility. You can withdraw your contributions (but not earnings) at any time without penalty, which provides a measure of liquidity that traditional accounts do not. Roth IRAs have no required minimum distributions during the account holder's lifetime, unlike traditional IRAs and 401(k)s which require withdrawals beginning at age 73.
If you have significant traditional account balances and are approaching retirement, contributing to Roth accounts helps diversify your tax exposure in retirement. Having a mix of taxable, traditional tax-deferred, and Roth accounts gives you flexibility to manage your tax bill year by year in retirement.
The Answer for Most People in Their 30s
For most people in their 30s earning moderate to upper-middle-class incomes, the recommended approach is: first, contribute enough to your 401(k) to get the full employer match — this is free money that immediately doubles your return. Second, contribute to a Roth IRA up to the annual limit if your income qualifies. Third, if you have more money to save after maxing the Roth IRA, return to the 401(k) up to the annual limit.
This order prioritizes the guaranteed return of the employer match, then takes advantage of the long-term tax-free growth benefit of the Roth during the years when your earning and tax rates are still relatively low, and then captures additional tax-advantaged space through the higher 401(k) limit.
The most important decision is not which account type to choose — it is simply to start contributing to something. The difference between a traditional and Roth account is meaningful over time, but both outperform a taxable account dramatically over long periods. Pick one and start.