Both a Roth IRA and a 401k are powerful retirement accounts — but they work differently and serve different purposes. The good news: you don’t have to choose one forever. The question is which to prioritize first.
How a 401k works
A 401k is offered through your employer. You contribute pre-tax money — meaning contributions reduce your taxable income today. The money grows tax-delayed, and you pay taxes when you withdraw in retirement.
2026 contribution limit: $23,500/year ($31,000 if you’re 50+)
Biggest advantage: Employer matching. If your employer matches contributions, that’s an instant 50–100% return on that money. Nothing in finance beats a 401k match.
How a Roth IRA works
A Roth IRA is an individual account you open yourself (Fidelity, Vanguard, Schwab). You contribute after-tax money — no deduction now, but all growth and withdrawals in retirement are completely tax-free forever.
2026 contribution limit: $7,000/year ($8,000 if you’re 50+)
Income limit: Phases out above $150,000 (single) / $236,000 (married) in 2026
Biggest advantage: Tax-free growth. If your account grows from $7,000 to $70,000, you owe zero taxes on that $63,000 gain.
The right order to use them
Most financial advisors recommend this sequence:
- Contribute to 401k up to the employer match — Free money first, always
- Max out your Roth IRA — Tax-free growth is too valuable to skip
- Go back and max out your 401k — If you have more to save after the Roth
Roth IRA vs 401k: key differences
- Tax timing: 401k = tax now, Roth = tax later (neither)
- Flexibility: Roth IRA contributions (not earnings) can be withdrawn anytime penalty-free
- Employer match: Only 401k has this
- Investment choice: Roth IRA wins — you choose from all investments; 401k is limited to your employer’s plan options
- RMDs: 401k has required minimum distributions at 73; Roth IRA does not
Which is better for young people?
Generally, the Roth IRA wins for younger earners. Here’s why: you’re likely in a lower tax bracket now than you will be at peak career earnings. Paying taxes on your contributions now (Roth) means you lock in today’s lower rate and never pay taxes on decades of growth.
The math over 30-40 years is staggering — $6,000 invested at 25 in a Roth could be worth $100,000+ at retirement, all tax-free.
Start with your 401k match, then open a Roth IRA. Do both if you can. Future you will be very grateful.