Many ask the question: should I contribute to a Roth 401(k) or contribute to a Roth IRA? Below I discuss why, in the vast majority of cases, I strongly favor Roth IRA contributions over Roth 401(k) contributions.
Roth Accounts
Who does not love tax free accounts? The Roth, properly distributed, can create tax free income.
The Roth is becoming particularly attractive for the early retiree trying to optimize Premium Tax Credits. Yes, you can potentially fund pre-65 retirement expenses from traditional retirement accounts or sales of taxable account assets. But (with uncommon exceptions) both trigger taxable income, increasing the possibility of going over the 400 percent of federal poverty level cliff.
Roth IRAs
Roth IRAs are an individual account and can be established at a plethora of financial institutions. Most working taxpayers qualify to make annual contributions to a Roth IRA. However, the ability to make an annual contribution to a Roth IRA phases out at certain income levels and is completely eliminated at $168,000 (single) or $252,000 (married filing joint) of modified adjusted gross income (2026 numbers).
The maximum annual contribution to a Roth IRA is $7,500 (if under age 50) or $8,600 (if age 50 or older) (2026 numbers).
Annual contributions can be withdrawn from the Roth IRA at any time for any reason tax and penalty free. Thus, Roth IRAs can perform double duty as both a retirement savings vehicle and as an emergency fund. This is an advantage of Roth IRAs over Roth 401(k)s.
Of course, considering their tax free growth, it is usually best to keep amounts in a Roth IRA for as long as possible, particularly during one’s working years.
Roth 401(k)s
Roth 401(k)s are a workplace retirement plan. Contributions can be made through payroll withholding.
The Roth 401(k) does enjoy some advantages when compared to its Roth IRA cousin. First, there is no income limit to worry about. Regardless of income level, an employee can contribute to a Roth 401(k). Second, the contribution limits are much higher than the contribution limits for Roth IRAs. As of 2026, the annual Roth 401(k) contribution limit is $24,500 (under age 50). Those aged 50 and older by year end qualify for additional catch-up contributions.
The Roth 401(k) is not a good account for emergency withdrawals. Withdrawals occurring prior to both the account holder turning 59 ½ years old and the account turning 5 years old generally pull out a mixture of previous contributions and taxable earnings.
Roth 401(k) vs Roth IRA
So which one should workers prioritize? Contributions to a Roth 401(k) or contributions to a Roth IRA?
To help us answer that question, let’s consider a young couple pursuing financial independence:
Stephen and Becky are both age 35, married (to each other), and pursuing financial independence. They both would like to retire at least somewhat early by conventional standards. They each have a W-2 salary of $110,000. They have approximately $2,000 of annual interest and dividend income. They claim the standard deduction of $32,200 in 2026. At this level of income, they have a 22 percent marginal federal income tax rate. Stephen and Becky each have access to a traditional 401(k) and a Roth 401(k) at work. They would like to maximize their retirement plan contributions.
How should Stephen and Becky allocate their retirement plan contributions? Should they contribute to a Roth 401(k) and/or to a Roth IRA?
To my mind, the best play here is to contribute to a Roth IRA ($7,500 each) and contribute to a traditional 401(k) ($24,500 each). Stephen and Becky should not contribute to a Roth 401(k).
There is a significant tax opportunity cost to making a Roth 401(k) contribution: the ability to deduct a traditional contribution to a 401(k). Remember, the Roth 401(k) shares the $24,500 annual contribution limit with the traditional 401(k). Every dollar contributed to a Roth 401(k) is a dollar that cannot be contributed to a traditional 401(k).
Contrast the significant tax opportunity cost of making a Roth 401(k) contribution to the tax opportunity cost of making a Roth IRA contribution: practically nothing.
Stephen and Becky have no ability to deduct a traditional IRA contribution because of their income level and the fact that they are covered by a workplace retirement plan. Thus, they aren’t losing much, from a tax perspective, by each making a $7,500 annual Roth IRA contribution.
For Stephen and Becky, the idea is to Pay Tax When You Pay Less Tax. As I’ve explored on my YouTube channel, it’s frequently the case that retirees are lightly taxed. The odds are that Stephen and Becky will pay the most tax when they are working. Thus, the better path is likely to be to take the tax deduction (the traditional 401(k) contribution) during their working years and then pay tax on traditional retirement accounts in retirement.
Trade Off Profile
The trade off profile of the traditional 401(k) versus Roth 401(k) tilts towards the traditional 401(k) contribution.
Every dollar contributed to a Roth 401(k) is a dollar that could not have been tax deducted into a traditional 401(k).
The opposite is true when it comes to IRAs. Every dollar contributed to a Roth IRA is not a dollar that could have been deducted into a traditional IRA in many cases due to the relatively low income limits many face on the ability to deduct a traditional IRA contribution.
If I’m going to do Roth, don’t I want to do the Roth that does not sacrifice a tax deduction?
Situations Where the Roth 401(k) Contributions Make Sense
Generally there are four situations where choosing to contribute to a Roth 401(k) makes sense. In these situations, the tax rate arbitrage play available to Stephen and Becky isn’t available.
In the first three situations below, a Roth 401(k) contribution is likely preferable to a traditional 401(k) contribution. As compared to a Roth IRA contribution, (a) the first contributions should generally be to the Roth 401(k) to secure the employer match, and then after that, (b) generally both the Roth 401(k) and the Roth IRA work well. To my mind, the emergency-type fund feature of the Roth IRA is probably the tiebreaker in favor of making the next contributions to a Roth IRA.
Transition Years
Think about a year one graduates college, graduate school, law school, or medical school. Usually, the person works for only the last half or last quarter of the year. Thus, they have an artificially low taxable income (since they only work for a small portion of the year). Why take a tax deduction for a contribution to a traditional 401(k) in such a year, when one’s marginal federal income tax rate might only be 10 percent?
End of career wind downs where one reduces workload, and thus, taxable income, can be a great time to switch to the Roth 401(k) for retirement contributions.
Transition years are a great time to make Roth 401(k) contributions instead of traditional 401(k) contributions.
Mini-Retirements
Taking a year-long mini-retirement beginning February 1st? January 401(k) contributions might be best made to the Roth 401(k) instead of the traditional 401(k).
No Hope
Picture a charismatic franchise NFL quarterback. He’s got a $50M plus annual NFL contact, endorsement deals, business ventures, and likely a long TV career after his playing days are done. For him, there is no hope ( 😉 ). He will probably be in the top federal income tax bracket the rest of his life. He might be well advised to “lock-in” today’s low (by historical standards) 37% federal income tax marginal tax rate by choosing to contribute to a Roth 401(k) instead of to a traditional 401(k).
High Earners’ Catch-Up Contributions
This isn’t a question of “traditional versus Roth” preference. It’s a question of the tax law.
Starting in 2026, those making more than $150,000 in prior-year W-2 wages from an employer cannot make catch-up contributions to a traditional 401(k). Their catch-up contributions must be made to the Roth 401(k).
Sure, this rule takes away a valuable tax deduction. But having Roth money going into retirement is not a bad thing. Those high earners with cash flow sufficient to make Roth catch-up contributions should consider doing so.
Additional Resource
Cody Garrett and I did a deep dive on all things retirement planning, including Roth retirement accounts, in Tax Planning To and Through Early Retirement, available on Amazon and many other online sources.
FI Tax Guy can be your financial planner! Find out more by visiting mullaneyfinancial.com
Follow me on LinkedIn: @SeanWMullaney
This post is for entertainment and educational purposes only. It does not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.