401(k), IRA, Roth -- What Is the Difference?

The Alphabet Soup of Retirement Accounts

Retirement accounts come with a lot of names and numbers that can be confusing. But they all boil down to one concept: the government created special account types that give you a tax advantage when you save for retirement. The tradeoff is that there are rules about when you can take the money out.

401(k) Plans

A 401(k) is a retirement account offered through an employer. Money goes in from your paycheck before taxes are taken out, which lowers your taxable income for that year. The money then grows without being taxed until you withdraw it in retirement, at which point it is taxed as regular income. For 2025, the IRS allows employees to contribute up to $23,500 per year, with an additional $7,500 in catch-up contributions for those 50 and older.

Many employers offer a match -- for example, they might put in 50 cents for every dollar you contribute, up to 6% of your salary. That match is essentially additional compensation. If you do not contribute enough to get the full match, that portion of your compensation goes uncollected.

Traditional IRA

An Individual Retirement Account (IRA) is something you open on your own, not through an employer. Like a 401(k), contributions may be tax-deductible depending on your income level and whether you have an employer plan. The money grows tax-deferred, and you pay taxes when you withdraw it in retirement. The 2025 contribution limit is $7,000 per year, or $8,000 if you are 50 or older.

Roth IRA

A Roth IRA flips the tax benefit. You contribute money that has already been taxed -- so you do not get a deduction now -- but the money grows tax-free, and qualified withdrawals in retirement are also tax-free. The contribution limits are the same as a traditional IRA. However, there are income limits that determine whether you can contribute to a Roth IRA directly. For 2025, the ability to contribute starts phasing out at $150,000 for single filers and $236,000 for married couples filing jointly.

Roth 401(k)

Many employers now offer a Roth option within their 401(k) plan. This works like a Roth IRA -- contributions are after-tax and qualified withdrawals are tax-free -- but with the higher 401(k) contribution limits. Unlike a Roth IRA, there are no income limits to participate in a Roth 401(k) if your employer offers one.

The Key Distinction: When You Pay Taxes

The fundamental difference between "traditional" and "Roth" accounts is timing. With traditional accounts, you get a tax break today and pay taxes later. With Roth accounts, you pay taxes today and get tax-free money later. Neither is universally better -- it depends on individual factors like current income, expected future income, and tax laws at the time of withdrawal, which are impossible to predict with certainty.