Quick takeaways
Two of the most common ways to save for retirement are 401(k) plans and Roth IRAs.
401(k) plans are offered by employers to help their employees save for retirement.
Roth IRAs are a type of retirement account that individuals may open and contribute to on their own.
Contributions to 401(k) plans can be pre-tax or after-tax, while contributions to Roth IRAs are always after-tax.
When it comes to crafting a retirement savings strategy, there are several options you can leverage. Two widely used retirement savings options are 401(k) plans and Roth IRAs, also known as Roth Individual Retirement Accounts.
In this post, we will discuss the differences between Roth IRAs and 401(k) plans, both of which are impactful ways to save for retirement. However, it is important to understand their key differences as you build a retirement savings strategy.
It's important to note, there are two types of IRAs: Roth IRAs and traditional IRAs. Both are retirement savings accounts, but the tax treatment of your funds is different between the two. In this post, we'll focus on Roth IRAs, but we've covered traditional IRAs on our blog.
What is a 401(k)?
A 401(k) is a tax-advantaged retirement savings plan. 401(k) plans are a benefit employers offer to help their employees save for retirement. One of the reasons 401(k) plans are popular is because contributions can be made pre-tax, so you can save on taxes as you contribute and/or as after-tax (Roth) so you can possibly save on taxes when you take the distribution.1 Another benefit of 401(k) plans is that some employers offer a match to your contributions, up to a certain percentage. A 401(k) match is money that they contribute to your 401(k) savings. This is part of your overall benefits package, and it's a great way for employers to offer you valuable compensation.
How much can I save with a 401(k)?
The IRS limits how much you can contribute to a 401(k) plan in a given year. The limits may change yearly in response to inflation and other economic factors. The limit on tax-advantaged plans aims to prevent high earners from unfairly benefiting, making these plans more equitable for everyone.
In 2026, the 401(k) contribution limit for participants is $24,5002, up from $23,500 in 2025. Those aged 50-59 and 64+ can save an additional $8,000 in 2026 in catch-up contributions, for a total of $32,500. For those aged 60-63, there's an extended catch-up contribution amount of $11,250, for a total of $34,750. The combined contribution limit, meaning how much you and your employer can contribute, is $72,000 for 2026 (excluding any catch-ups).
The IRS allows people who are 50 and up to make these "catch-up contributions" because they are closer to retirement, so they may need to catch-up to make sure they have enough funds saved for retirement.
How are 401(k) plans taxed?
Understanding how your money will be taxed when saving for retirement is important, as it can have a big impact on your plans for the future.1 401(k) plans are tax-advantaged in a few ways.
When you contribute money to your plan pre-tax, it is taken out of your paycheck before taxes are applied. This helps to lower the amount of taxes you owe on your paycheck.1 Additionally, the money you've invested will grow without incurring taxes during that time. However, you'll have to pay ordinary income taxes on the full amount when you withdraw the funds later.
If your contributions to the 401(k) plan are done on a Roth basis the money comes out after you have paid taxes. This means your contributions will take a bigger bite out of your paycheck today. When you take a distribution of your Roth contributions you will not have to pay taxes (because you already did). The big advantage comes when you take the distribution that is qualified — you will not pay taxes on the earnings meaning they will not just be tax deferred but entirely tax free.4
What are the withdrawal rules for 401(k) plans?
There are some rules around when money can (or must) be withdrawn from a 401(k). One of these rules revolves around taking a required minimum distribution.
A required minimum distribution, or RMD, is the amount you're required to withdraw from your retirement account each year to meet regulations. The IRS implements these rules so they can collect taxes on 401(k) funds at some point, rather than letting them sit indefinitely.
Currently, the IRS says that you must start taking RMDs at either 73 and 75, depending on when you were born. The RMD you must take is calculated by dividing your non-Roth account balance (as of December 31 of the previous year) by your life expectancy factor. Generally, your life expectancy factor is taken from the IRS uniform life expectancy tables. As you can probably tell even from those few sentences, RMDs have some pretty detailed rules around them, and it's important you get them right. It's always a good idea to confer with a tax or retirement professional to confirm you are taking the right distributions.1
401(k) plans also have rules that limit when you can take your money out. These rules are specific to each plan but are often limited to when you reach age 59 ½ or leave employment.
What is a Roth IRA?
A Roth IRA is a personal retirement savings vehicle. You can choose to open one at any time, and there are a variety of options on the market.
There are a few reasons why you might choose to have a Roth IRA. One reason is that contributions are made with post-tax money so withdrawals of the amount contributed are tax-free. When you fund your Roth IRA, you use money that has already been taxed. However, when you withdraw it later on, you won't have to pay any additional taxes. This can be a wise savings strategy if you anticipate being in a higher tax bracket when you retire.1 Depending on when you take the earnings out there is the possibility they will come out tax-free, as well.4 Additionally, there are no required minimum distributions from a Roth IRA. So you can save and save and save if you choose, provided you are within the income and contribution limits (see below).
Roth IRA contribution limits
Just like 401(k) plans, the IRS sets limits for how much savers can contribute to their IRA plans in a given year. In 2026, the IRA contribution limit is $7,500.2 For savers age 50 and up, that limit increases to $8,600. This limit is combined between Traditional and Roth IRAs.
Roth IRA income limits
An important factor to consider when deciding if a Roth IRA is right for you is if you meet the income limit. This means that individuals who make over this limit cannot contribute to a Roth IRA at all. This rule is in place for the same reason the IRS creates other limits on retirement accounts: to keep things fair and not overly favor high-earners. The income limit is based on Modified Adjusted Gross Income (MAGI) and tax filing status.
For 2026, the income limits are as follows:
Tax-filing status | 2026 MAGI | Contribution allowed |
Single or head of household | $150,000 or less | Full |
$150,000 - $165,000 | Partial | |
$165,000 or more | None | |
Married, filing jointly or qualifying widow(er) | $236,000 or less | Full |
$236,000 - $246,000 | Partial | |
$246,000 or more | None | |
Married, filing separately | $10,000 or less | Partial |
$10,000 or more | None |
Understanding Roth IRA withdrawals
The amount you contributed to a Roth IRA can be taken out tax and penalty-free at any time as the money was already taxed upon contribution. If the distribution is a qualified distribution, the earnings will also be tax-free and penalty-free.4
There are two general criteria to have a qualified distribution from a Roth IRA — having a qualifying event and meeting the five year rule. In order to have a qualifying event you must meet one of the following:
You are age 59½ or over.
You are disabled.
The distribution is made to a beneficiary or your estate due to your death.
You are a first-time homebuyer (this has a lifetime limit of $10,000).
Roth IRAs also have something called "the five-year rule." This rule says that in order for a distribution of Roth assets to be qualified, you have to wait at least five years since you first contributed to a Roth IRA. This period begins on the first day of the tax year in which you made your first Roth contribution to any Roth IRA.
Key differences between 401(k) plans and Roth IRAs
401(k) | Roth IRA | |
Tax treatment of contributions | Pre-tax or after-tax contributions. | After-tax contributions. |
Tax treatment on withdrawal | Pre-tax: Taxed as ordinary income. Roth: Tax-free for contributions and potentially tax-free for earnings.⁴ | Tax-free for contributions and potentially tax-free for earnings.⁴ |
Maintained by | Employer | Individual |
Annual individual contribution limits² | In 2026: Under age 50: $24,500. Ages 50–59, 64+: $32,500. Ages 60–63: $35,750. | In 2026: Under age 50: $7,500. Ages 50+: $8,600. |
Income limit² | No | Yes. In 2026 your maximum contributions will be limited if your Modified Adjusted Gross Income is $153,000 or higher. |
Employer contributions | Available. Your employer may choose to match what you contribute to your 401(k) or make a profit sharing contribution, up to a combined contribution of $72,000 in 2026. | Not available. |
Investment choices | Often more limited than IRAs. | Typically a wide array of options set by the organization where you open your IRA. |
Can I have a 401(k) and a Roth IRA?
Yes! You can save for retirement with both a 401(k) and a Roth IRA.
After learning about the differences and benefits of both plans, you may be wondering if you can have both at the same time. The short answer is yes. The long answer is that they are two different and often complementary ways of saving for retirement. You can have both and contribute to both in a given year, as long as you follow the contribution limits for each. It's all about what works for you and your retirement goals.
The information provided in this blog post is accurate and up-to-date as of May 2026. IRS plans and limits are subject to change. Please consult a Financial Professional for the most current information regarding your specific financial situation.
FAQs
What is the main difference between a 401(k) and a Roth IRA?
A 401(k) is an employer-sponsored plan with higher contribution limits and potential employer contributions, while a Roth IRA is an individual account with after-tax contributions and typically tax-free qualified withdrawals.
Can I contribute to both a 401(k) and a Roth IRA?
Yes, you can contribute to both accounts in the same year as long as you stay within the contribution limits for each account and meet the compensation limit for the Roth IRA.
Are there income limits for 401(k) contributions?
No, there are no income limits for 401(k) contributions. However, Roth IRAs have income limits that may reduce or eliminate your ability to contribute.
Which account is better for retirement savings?
Both have advantages. 401(k) plans offer higher limits and possible employer contributions, while Roth IRAs offer possible tax-free withdrawals. Many people benefit from using both.1
Disclosures
¹ This content is for informational purposes only and is not intended to be taken as tax advice. Please contact a tax professional for further information.
2May be adjusted annually to account for IRS cost-of-living adjustments. Learn more.
3 Investment advisory services for Gusto’s 401(k) (when 3(38) fiduciary services are selected) and SEP IRA/IRA products are offered by Gusto Investment Services, LLC, an affiliated SEC-registered investment adviser. For more information regarding these services, see the ADV 2A Brochure and Form CRS.
Recordkeeping services for Gusto’s 401(k) and SEP IRA/IRA products are offered by its affiliate, Gusto Retirement Services, LLC. 3(16) plan administrative services are also offered by Gusto Retirement Services, LLC and only made available to clients who use the integration services available through Gusto’s payroll service. Gusto Retirement Services, LLC uses a third-party to provide custodial services. 4 Roth contributions are always distributed tax-free. Earnings on Roth contributions are distributed tax-free if the following conditions are met: (a) you're either over age 59 ½, disabled, or have died AND (b) it has been 5 years since your first Roth contribution under the current plan. Please consult a qualified financial advisor or tax professional to determine what is applicable to your financial situation.
