Retirement Planning: 401(k) vs Roth IRA

The Short Answer

If your employer offers a 401(k) with a match, contribute at least enough to get the full match — that's an instant 50–100% return on your money. Then max your Roth IRA. Then go back and max your 401(k). If your employer has no 401(k), open a Roth IRA today.

That's the framework. The rest of this article explains why, and what to do in your specific situation.

How Each Account Works

Traditional 401(k)

You contribute pre-tax dollars, which lowers your taxable income today. The money grows tax-deferred. You pay income tax when you withdraw in retirement. In 2024, you can contribute up to $23,000 (or $30,500 if you're 50 or older). Many employers match a portion of what you put in — that's free money you should never leave on the table.

Roth IRA

You contribute after-tax dollars — no deduction today. But the money grows completely tax-free, and qualified withdrawals in retirement are also tax-free. The 2024 limit is $7,000 ($8,000 if 50+). There are income limits: single filers earning above $161,000 and married filers above $240,000 begin to phase out. Crucially, Roth IRAs have no Required Minimum Distributions (RMDs), giving you complete flexibility in retirement.

Traditional IRA

Similar to a 401(k) in tax treatment, but with lower limits ($7,000/year). If you or your spouse have access to a workplace plan, the deductibility phases out at certain income levels. Still useful as a vehicle to do a "Backdoor Roth" conversion for high earners.

Which Should You Choose?

The Priority Order

Follow this sequence each year, in order:

1. 401(k) up to employer match. If your employer matches 50% of the first 6%, contribute at least 6%. Anything less is walking away from free money.
2. Max your Roth IRA ($7,000/year). Open one at Fidelity, Vanguard, or Schwab. Invest in a low-cost S&P 500 index fund or a target-date fund.
3. Max your 401(k) ($23,000/year). Go back and fill it to the legal limit.
4. Taxable brokerage. If you've maxed all tax-advantaged accounts, invest the rest here.

What If Your Employer Doesn't Offer a 401(k)?

This is common at smaller companies. You still have excellent options:

Roth IRA or Traditional IRA

Open one yourself. Fidelity and Vanguard both have zero account minimums. Invest in a total market index fund. The $7,000 annual limit is low, but tax-free compounding over 30+ years is powerful.

SEP-IRA (If Self-Employed or Freelancing)

Contribute up to 25% of your net self-employment income, or $69,000 in 2024 — whichever is less. This is the most powerful retirement tool for freelancers and solo business owners. Easy to open at any major brokerage.

Solo 401(k) (If Self-Employed with No Full-Time Employees)

Allows the same contribution limits as a regular 401(k), plus the ability to also contribute as the "employer." Effective limit can reach $69,000/year. You can also choose a Roth Solo 401(k). Slightly more paperwork than a SEP-IRA but more contribution room.

HSA — The Hidden Triple-Advantage Account

If you're on a High-Deductible Health Plan (HDHP), max your HSA first. Contributions are pre-tax, growth is tax-free, and withdrawals for medical expenses are tax-free. After 65, you can withdraw for any reason (just like a Traditional IRA). 2024 limits: $4,150 single, $8,300 family. Many people under-appreciate how good this account is.

One Simple Rule to Remember