Roth IRA vs. 401(k): How to Prioritize Contributions

For US savers, two common retirement options are the employer-sponsored 401(k) and the individual Roth IRA. Choosing where to put additional savings depends on employer match, tax outlook, and flexibility needs.

Step 1: Capture the match. If your employer offers a 401(k) match, contribute enough to get the full match. That match is effectively free money and should be prioritized ahead of most other retirement choices.

Step 2: Consider Roth benefits. A Roth IRA accepts after-tax contributions but offers tax-free growth and withdrawals in retirement. This is advantageous if you expect to be in a similar or higher tax bracket later, or if you value tax diversification.

Step 3: Compare tax deferral. Traditional 401(k) contributions reduce taxable income now. If you need the current year tax break or are in a high bracket, prioritizing tax-deferred contributions may make sense, especially after matching.

Step 4: Evaluate fees and investment options. Many employer 401(k) plans have limited funds and higher fees. If your 401(k) is expensive, max the employer match and then consider contributing to a Roth IRA or a taxable brokerage account with lower fees.

Step 5: Consider contribution limits and flexibility. Roth IRAs have income limits for contributions and lower annual limits compared to 401(k)s. 401(k)s allow higher total contributions if you want to save aggressively.

A practical sequence for many:
1) Contribute to 401(k) up to employer match.
2) Fund a Roth IRA if you’re eligible (tax diversification and flexibility).
3) Return to 401(k) to increase contributions toward retirement goals.

Tax rules and personal situations vary—consult a tax advisor for a tailored plan—but the above sequence balances free employer match, tax diversification, and low-cost investing.

This article expands on Roth IRA vs. 401(k): How to Prioritize Contributions with practical steps, regional examples for English-speaking countries, and a clear, action-oriented closing paragraph to ensure readers have next steps they can implement this week.