401(k) vs IRA vs Roth: Which Retirement Account is Best?

Traditional 401(k)

The most common employer-sponsored retirement plan. Contributions are made pre-tax, reducing your taxable income in the year you contribute. Growth is tax-deferred, and withdrawals in retirement are taxed as ordinary income.

Roth 401(k)

Same contribution limits as the Traditional 401(k), but contributions are made with after-tax dollars. No upfront tax deduction, but qualified withdrawals in retirement are completely tax-free — including all investment growth.

• No income limits: Unlike the Roth IRA, there are no income restrictions on Roth 401(k) contributions. High earners who can't contribute to a Roth IRA directly can use this option.
• Employer match goes pre-tax: Even if you contribute to a Roth 401(k), your employer's matching contribution goes into a traditional (pre-tax) account.
• No RMDs (starting 2024): The SECURE 2.0 Act eliminated RMDs for Roth 401(k) accounts, aligning them with Roth IRAs.

Traditional IRA

An Individual Retirement Account available to anyone with earned income. Contributions may be tax-deductible depending on your income and whether you have access to a workplace retirement plan.

Roth IRA

After-tax contributions, tax-free growth, tax-free qualified withdrawals. The most flexible retirement account — contributions (not earnings) can be withdrawn at any time without penalty or taxes, making it a partial emergency fund.

• 2025 income phaseouts: Single: $150,000-$165,000. Married filing jointly: $236,000-$246,000.
• Backdoor Roth: High earners above the income limit can contribute to a non-deductible Traditional IRA and immediately convert to Roth. Watch for the pro-rata rule if you have existing pre-tax IRA balances.
• No RMDs: Unlike all other retirement accounts, Roth IRAs never require withdrawals during the owner's lifetime.
• 5-year rule: Earnings are only tax-free if the account has been open for at least 5 years and you're 59 1/2+.

SEP IRA

The Simplified Employee Pension IRA is designed for self-employed individuals and small business owners. It allows much higher contributions than a standard IRA.

• 2025 contribution limit: Up to 25% of net self-employment income, capped at $70,000.
• Employer-only contributions: Only the employer (or self-employed individual) contributes — there are no employee deferrals.
• Simple to set up: Less paperwork than a Solo 401(k). Good for sole proprietors without employees.

Solo 401(k)

Also called an Individual 401(k), this is the most powerful option for self-employed individuals with no full-time employees (a spouse can participate).

• 2025 contribution limit: $23,500 as employee deferral + up to 25% of net self-employment income as employer contribution, up to $70,000 total ($77,500 with catch-up).
• Roth option available: Many providers offer a Roth Solo 401(k) option for the employee deferral portion.
• Loan provision: You can borrow up to $50,000 or 50% of the vested balance from a Solo 401(k) — an option not available with SEP IRAs.

Rollovers: Moving Between Accounts

When you leave a job or want to consolidate accounts, rollovers let you move money between retirement accounts without triggering taxes (if done correctly). The most common paths:

• 401(k) to Traditional IRA — tax-free direct rollover
• 401(k) to Roth IRA — taxable conversion (you pay income tax on the converted amount)
• Traditional IRA to Roth IRA — taxable conversion (Roth conversion)
• Old 401(k) to new employer's 401(k) — tax-free if accepted

Always request a direct (trustee-to-trustee) rollover to avoid the 20% mandatory withholding that applies to indirect rollovers. You have 60 days to complete an indirect rollover, and you must replace the withheld 20% from other funds to avoid it being treated as a taxable distribution.

The Optimal Strategy for Most People

There is no single best account — the optimal approach combines multiple account types. A common priority order: (1) contribute to your 401(k) up to the employer match (free money), (2) max out a Roth IRA if eligible, (3) go back and max out the 401(k), (4) if self-employed, consider a SEP IRA or Solo 401(k) for additional tax-advantaged space. Entering retirement with both pre-tax and Roth assets gives you maximum flexibility to manage your tax liability each year.

This article is for educational purposes only and does not constitute financial advice. Consult a qualified financial advisor for guidance specific to your situation.