Tax-Beneficial Savings: Roth IRA vs. Roth 401(k)

A recent survey from the Plan Sponsor Council of America found that 93% of 401(k) plans now allow Roth salary deferrals. If your plan offers a Roth 401(k), you may be wondering:

“Should I contribute to a Roth 401(k), a Roth IRA, or both?”

If you can’t maximize both, here’s a breakdown of the advantages of each—because the right choice depends on your goals, flexibility needs, and tax strategy.

Why Roth IRAs Can Be More Attractive

1. More investment freedom

Roth IRAs offer unlimited investment options, while Roth 401(k)s limit you to the investments within your employer’s plan.

2. Easier access to your money

Roth 401(k)s generally can’t be accessed until age 59½ or you leave your job.

Roth IRAs allow withdrawals anytime—though earnings may be taxable if not qualified.

3. Simpler rules for tax-free withdrawals

Roth IRAs have a single five-year clock tied to your first-ever Roth IRA.

Roth 401(k)s require a five-year period specific to that employer plan.

4. More favorable withdrawal ordering rules

Roth IRA rules let you withdraw contributions before taxable earnings.

Roth 401(k)s use a pro-rata rule, meaning each withdrawal may include taxable earnings.

5. RMD advantage—historically

Before 2024, Roth IRAs weren’t subject to required minimum distributions (RMDs); Roth 401(k)s were.

Now, neither is subject to lifetime RMDs, putting them on equal footing here.

Why a Roth 401(k) May Be the Better Choice

1. Stronger creditor protection

If your Roth 401(k) is part of an ERISA plan, it has unlimited protection from creditors.

Roth IRA protection varies by state.

2. Ability to borrow

Most 401(k) plans allow loans from Roth contributions.

Roth IRAs do not allow loans—ever.

3. Employer matching

Many employers match Roth 401(k) contributions.

Roth IRAs never include a match.

4. No income limits

Roth IRA contributions phase out at higher income levels.

Roth 401(k)s have no income limits, though highly compensated employees may have plan-based restrictions.

So… What’s the Best Move?

This is the core question:

Do you prefer to pay taxes now and enjoy tax-free withdrawals later?

—or—

Would you rather defer taxes today and grow your savings before paying them in retirement?

Your answer depends on your current tax bracket, future expectations, cash flow, and long-term goals.

If you want help exploring your options or building a tax-beneficial savings strategy, reach out:

📩 Contact: js@joesimon.solutions