A 401(k) and a Roth IRA are both powerful retirement accounts, but they work differently, especially on taxes. Many people use both. Here is how to decide what to fund first.
The core difference: taxes now or later
A traditional 401(k) is funded with pre-tax dollars: you get a tax break today and pay income tax when you withdraw in retirement. A Roth IRA is funded with after-tax dollars: no break today, but qualified withdrawals in retirement are completely tax-free, including all the growth.
Other key differences
| Feature | 401(k) | Roth IRA |
|---|---|---|
| Employer match | Often yes | No |
| Taxes on withdrawal | Taxed | Tax-free (if qualified) |
| Contribution limit | Higher | Lower |
| Income limits to contribute | No | Yes |
| Investment choices | Set by plan | Wide open |
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A simple funding order
- 401(k) up to the full employer match — it’s free money and an instant return.
- Roth IRA — tax-free growth and flexible investment options, if you’re eligible.
- Back to the 401(k) — keep going up to the annual limit once the Roth is maxed.
This order captures guaranteed match money first, then locks in tax-free growth. Contribution limits change yearly, so check the current IRS figures. This is general education, not tax advice — a tax professional can tailor it to you.