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The Differences in a 401k and Roth IRA Retirement Account

Updated on December 1, 2019

What is a 401k

A 401(k) is a retirement account that many employers offer. You can invest a portion of your pay or a fixed amount each month. You make your investments with pretax money, which means it isn't taxed. It is taxed when you withdrawal it, which I'll explain more later.

The money you invest in a 401(k) can go into several different types of mutual funds, depending on what you want and plan to do.

The major benefit of 401(k) plans is that your employer can match your investment up to a fixed amount. Matching is optional, so it isn't offered by many employers. If your employer offers a 401(k), find out if your employer offers a match so you can make your money work for you. The match is basically free money, so always take it if you can.

Once you invest, the money you invest is all yours, even if the matching employers company goes belly up.


The main advantages of a 401(k):

  • It has a high contribution limit. 19 thousand which could be matched
  • Employers oftentimes match your investment, which is pretty much free money.
  • Anyone can invest in 401(k), no matter how much you make.
  • Tax break, which lowers taxable income


The 401(k) is an amazing retirement account, like everything it has its drawbacks.

  • Many other accounts have more mutual fund choices to invest in.
  • You have to work for a company a while before getting the 401(k) plan
  • The money is penalized if you withdraw before age 59.5, or leave it past 70.5

Roth IRA

A Roth IRA is a retirement account you can open yourself. Unlike a 401(k) retirement account, you invest in a Roth IRA with money you've already paid taxes on. This allows your investments to grow tax free. Unlike the 401(k), you can withdrawal at 59.5 tax free.

An IRA is a great option for self employed people or small business employees that don’t offer a 401(k) match/plan. If you already have a 401(k), you could diversify your investments by opening an IRA.


Here are some advantages of a Roth IRA:

  • Tax-free growth because you payed taxes at the start. This means you won't be taxed to make withdrawals.
  • With a Roth IRA, you have many more options to invest in, which is great as long as you do your research.
  • The Roth IRA doesn't rely on an employer
  • You won't be penalized for leaving the money in after age 70.5, just if you withdrawal before 59.5.
  • You don't need a full time job to open a Roth IRA


Everything has downsides, even Roth IRA:

  • You can only invest 6,000 a year, or 7,000 a year after age 50. This is terrible compared to a 401(k)
  • The Roth IRA has income limits, but the 401(k) doesn't

So Which Is Better?

It all depends on your situation. The best choice is to consult a professional so you can be sure you're making the most of your money.


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