Here’s the Real Difference Between an IRA, 401(k), Roth IRA, and a Roth 401(k) (2024)

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You’re set to start saving for your future. You already put money aside for retirement every month, but you’re probably already wondering how you should invest it. Which type of retirement savings account is best for you? Should you start a 401(k), an IRA, a Roth 401(k), or a Roth IRA? What even are the differences? What about if your first home is your savings priority right now?

Here, we break down each retirement account for you (with help and advice from a few financial experts):

What’s a 401(k)?

First things first: Let’s get on the same page about what we’re talking about. A traditional 401(k) is an employer-sponsored retirement investment account. It usually comes as part of a job benefits package.

Sometimes with a 401(k), your employer will match the amount of money you save (generally up to a small percentage of your salary), meaning your investments are doubled with no extra work on your end(!). Investment options with traditional 401(k)s often come preselected by your employer.

With a 401(k), all contributions are taken out of your paycheck pre-tax—an automatic savings method that also lowers your taxable income (a.k.a. you pay less income tax each year.) Traditional 401(k)s allow for yearly contributions of up to $19,000. After you turn 50, you can contribute up to $25,000 every year. There are no income limitations on 401(k)s, meaning you can take advantage of them no matter your salary.

Under some circ*mstances, you can start withdrawing money from your 401(k) at age 55, but the official withdrawal age is 59.5. You must start taking withdrawals at age 70.5. When you eventually withdraw, you will pay taxes on the money.

What’s an IRA?

Now, a traditional individual retirement account (IRA) is, like a 401(k), also a retirement investment account. However, instead of going through your employer, you can open up an IRA at most financial institutions like a bank, credit union, or brokerage.

You have to be under age 70.5 to open one up and your contributions may be tax deductible if you aren’t covered by a retirement plan at work.

“Rolling over”

Additionally, because it’s tied to your employment, you can combine your 401(k) from a previous job with your 401(k) from your new employer, a process called “rolling over” your investment. You can also “roll over” these funds into a single IRA.

“It’s not uncommon to have a 401(k) or two from a past employer with funds inside,” says R.J. Weiss, a Certified Financial Planner and founder of the personal finance site The Ways to Wealth. “If that’s the case, consider rolling a previous 401(k) over to an IRA. Not only will this allow you to simplify your financial life a bit, 401(k) fees on average are higher than IRA fees, so you’ll likely save money long-term.”

So What’s a Roth IRA/401(k)?

There is also a special kind of account called a “Roth” account, which is a retirement account that is funded with after-tax dollars (i.e. your take-home pay). And because you’re paying taxes up front, you won’t have to pay additional taxes when you withdraw in retirement (like you would with a traditional 401(k). Unlike traditional IRAs, you can take out a Roth IRA at any age. Some employers also offer Roth 401(k)s, which essentially mimic the rules of regular 401(k)s, but with the tax-withdrawal benefits of Roth accounts.

Roth IRAs typically have a wider range of investment options than 401(k)s and Roth 401(k)s. However, the yearly investment amount is lower: For Roth IRAs (and IRAs), you can contribute up to $6,000 per year until you’re 50, and $7,000 per year after that. For Roth 401(k)s, the contribution limitations are the same as 401(k)s ($19,000 in 2019 and an additional $6,000 if you’re over 50.)

Another big benefit of a Roth IRA is the ability to withdraw contributions (as in the money you have paid in yourself) tax- and penalty-free, anytime. If you want to withdraw any earning (any growth on your original investment), you will have to pay taxes and penalties if you do before you’re 59.5. Additionally, you’re not required to take money out when you’re 70.5, like you do with a 401(k). This means you can keep money in your account to grow tax free for as long as you’d like.

However, with a Roth 401(k), you are beholden to the same required distributions in your 70s as a traditional 401(k).

Not everyone can have a Roth IRA, either: If you make more than $122,000 and file your taxes as a single person ($193,000 combined if you file jointly), your ability to contribute to a Roth IRA is limited. If you make more than $137,000 as a single filer ($203,000 if filing jointly), then you can’t contribute to a Roth IRA—unless you’re okay with being charged a hefty 6 percent excise tax. You can, however, always have a Roth 401(k), regardless of your income.

Because of this, Weiss says that people who benefit most from a Roth IRA or a Roth 401(k) have a lower tax-rate today than they would in retirement.

How does this relate to buying a home?

If you’re looking to buy a home sometime soon, a Roth IRA may be a good way to help your investment grow—first-time homebuyers can use up to $10,000 of earnings penalty and tax-free to purchase a home once their account has been open five years. (You can read more about the specifics here!)

However, this isn’t always recommended by all financial experts:

“Saving for a home purchase in the next few years is best done through a high-yield savings account (HYS),” says Lauren Anastasio, a wealth advisor at SoFi. “By taking advantage of an HYS, you take on less risk and do not have to worry about the IRS contribution limits that IRAs are subject to. I encourage my clients to think about their IRA as a safety net if you need to come up with a little extra dough at closing, but not your primary plan.”

However, Weiss is a fan of this method given the flexibility that the IRS has on Roth IRAs. He says saving for a down payment on a home and retirement doesn’t have to mean opening separate accounts.

“Actually, one can save money on taxes by placing their down payment savings within their IRA,” he says.

Though you can’t take free withdrawals from your 401(k), you can borrow from it (with interest) if the need arises:

“If your 401(k) plan allows it, you may be able to borrow up to the smaller of $50,000 or one-half of your vested balance from your plan,” says Logan Allec, a Certified Public Accountant and owner of Money Done Right. “One cool thing about borrowing from your 401(k) is that any interest you pay is paid right back into your 401(k) plan. While the verdict is out on whether or not this is a smart financial move in general, it is generally regarded to be a smarter move than taking out, say, a payday loan with exorbitant interest and fees.”

What does this all mean for you?

So which investment type should you choose? IRA or 401(k)—Roth or traditional? The easy answer? A healthy retirement investment strategy will have a mix of both.

If your employer offers a 401(k)—especially if they match contributions—you should definitely open one and at least max out the matching amount. Additionally, if your employer offers a Roth 401(k) and you’re okay with getting less in your paycheck every month, it may be wise to get a Roth, since the value of $1 in a Roth account is greater than $1 in a traditional account, Weiss says. Typically, Roth accounts favor those just starting out: “The longer your account is invested, the more growth you will likely experience and the greater your overall tax savings,” says Anastasio.

Additionally, if you’re worried about needing extra money in the future, a Roth IRA is a good idea, too: “For example, one could simultaneously save for an emergency fund and a Roth IRA, knowing that funds within their IRA could be used if necessary,” he says.

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