Roth IRA or 401(k): Which First?
Most people do not have to choose. The two accounts sit in a sequence, and following it is worth more than getting the tax argument perfectly right.
The order
- 401(k) up to the full employer match. A match is part of your compensation. Not taking it is declining pay.
- Roth IRA, to the annual limit. Wider investment choice, usually lower fees, and tax-free withdrawals in retirement.
- Back to the 401(k), up to its limit, if you have more to contribute.
- Taxable brokerage after that.
Two exceptions. If your 401(k) has unusually low-cost funds and no match, the middle two steps can swap. If your income is above the Roth IRA limit, step two becomes a different conversation.
What actually differs
| 401(k) | Roth IRA | |
| Who opens it | Your employer | You, at any broker |
| Tax on contributions | Usually pre-tax, lowering this year's taxable income | After-tax, no deduction |
| Tax in retirement | Withdrawals taxed as income | Qualified withdrawals tax-free |
| Investment choice | The plan's menu | Nearly anything the broker offers |
| Contribution limit | Much higher | Lower, and phased out at higher incomes |
| Employer money | Match, if offered | None |
Limits change every year. Contribution caps and Roth income phase-outs are adjusted annually — check the current figures on IRS.gov before deciding how much to put where.
The tax argument, briefly
Pre-tax contributions help if your tax rate is lower in retirement than it is now. Roth contributions help if the reverse is true. Nobody knows their future rate, which is why the honest answer for most people is to end up with some of each — and why the order above, which produces exactly that, is a reasonable default rather than an optimisation.
Early in a career, when income is lower, the Roth case is stronger. Late in a high-earning career, the pre-tax case is stronger.
If your plan offers a Roth 401(k)
You can make Roth-style contributions inside the plan, keeping the higher limit and the match. The match itself may be deposited pre-tax depending on the plan. This is a good option if you want Roth treatment above the IRA limit.
Related
The bigger question: save it or invest it? and Roth IRA vs high-yield savings.
Opening one: Ally Roth IRA, Chase Roth IRA, the backdoor Roth.
Common questions
Should I contribute to a Roth IRA or a 401(k) first?
Contribute to the 401(k) up to the full employer match first, then fund a Roth IRA, then return to the 401(k) if you have more to invest.
Can I have both a Roth IRA and a 401(k)?
Yes. They have separate contribution limits, though Roth IRA eligibility phases out above certain income levels.
Is a Roth better than a traditional 401(k)?
It depends on whether your tax rate is higher now or in retirement. Since that is unknowable, holding some of each is a reasonable outcome.
What if my employer offers no match?
Then the Roth IRA usually comes first, unless the plan's funds are notably cheaper than what you could buy on your own.
Figures and rules in this article are checked against the official sources below. Where they disagree with us, they win.