401(k) vs Roth IRA: which should you prioritize?

Both 401(k) and Roth IRA are powerful retirement accounts, but they work differently. The right choice depends on your current tax bracket, expected retirement tax bracket, and whether you want flexibility now or tax-free growth later.

The quick decision framework

• Step 1: Always contribute enough to your 401(k) to capture the full employer match. That's a guaranteed 100% return — beats any investment.
• Step 2: After capturing the match, max out a Roth IRA ($7,000/year in 2025, $8,000 if 50+).
• Step 3: If you still have money to invest, go back and max out your 401(k) ($23,000/year in 2025).
• Step 4: If you've maxed both, taxable brokerage account.

The tax difference (this is the core)

Traditional 401(k): contribute pre-tax, pay taxes when you withdraw in retirement. Roth IRA: contribute post-tax, pay zero tax on growth or withdrawals. The decision hinges on whether you expect to be in a higher or lower tax bracket in retirement.

When Roth IRA wins

• You're early in your career, in a low tax bracket now (12-22%), and expect to earn more later
• You expect tax rates to rise in general (common assumption given US debt)
• You want flexibility — Roth contributions can be withdrawn tax/penalty-free anytime
• You want tax-free inheritance for heirs

When traditional 401(k) wins

• You're in a high tax bracket now (32%+) and expect to retire in a lower state/bracket
• Your state has high income tax now but you'll retire in a no-income-tax state
• You need the tax deduction to afford contributing at all
• You want to reduce MAGI for student loan payments (SAVE plan) or ACA subsidies

Income limits matter

Roth IRA has income phase-outs: direct contributions phase out between $146K-$161K (single) or $230K-$240K (married filing jointly) in 2024. Above these, you need a Backdoor Roth strategy. 401(k) has no income limit.

The "do both" strategy

Most people should do both when possible: capture 401(k) match + max Roth IRA + increase 401(k) contributions. This provides tax diversification in retirement — you can choose which bucket to withdraw from based on the year's tax situation.