Roth IRA vs. 401(k): which should you fund first?

A Roth IRA and a 401(k) are both powerful retirement accounts, and for most people the question is not "which one" but "which one first." Getting the order right — and understanding the tax difference — can add up to real money over a career.

The key difference: when you pay tax

• Traditional 401(k): contributions are made before tax, lowering your taxable income today. The money grows untaxed, and you pay ordinary income tax when you withdraw it in retirement.
• Roth IRA: contributions are made with money you have already paid tax on. The money grows tax-free, and qualified withdrawals in retirement — including all the growth — are completely tax-free.

In short: a traditional 401(k) gives you a tax break now; a Roth IRA gives you tax-free income later. A Roth is especially attractive if you expect to be in a higher tax bracket in retirement than you are today — which is common for younger savers early in their careers.

The funding priority most planners agree on

1. 401(k) up to the full employer match. If your employer matches contributions, that is free money and an instant, guaranteed return no other account can match. Always capture the full match first — see our employer match explainer.
2. Then a Roth IRA, up to the annual limit. After the match, a Roth IRA offers tax-free growth and more investment freedom than most 401(k) plans, which are limited to the funds your employer selects.
3. Then back to the 401(k). Once the Roth IRA is maxed, keep filling the 401(k) toward its (much higher) annual limit.

Other things that tip the decision

• Income limits. Roth IRAs have income eligibility limits, and contribution limits are set each year. Check the current figures before contributing.
• Investment choice. An IRA lets you invest in almost anything, including low-cost index funds; 401(k)s are limited to a menu.
• Access. Roth IRA contributions (not earnings) can generally be withdrawn without penalty, which adds flexibility a 401(k) does not have — though retirement money is best left to grow.
• Tax diversification. Having both pre-tax (401k) and after-tax (Roth) money gives you flexibility to manage your tax bill in retirement.

The bottom line

It is not Roth or 401(k) — it is both, in order: fund the 401(k) to the full match, then max a Roth IRA, then return to the 401(k). That sequence captures free money first, then tax-free growth, then tax-deferred growth. See what steady contributions to any of these could become with the compound interest calculator.

Educational information only, not tax or investment advice. Contribution and income limits change annually and eligibility varies — confirm current rules and consider a professional for your situation.