The question that stops people cold
You hear both terms constantly. You know they're retirement accounts. You have no idea which one you're supposed to use or if you're supposed to use both.
Nobody explained the difference in plain English. So you did nothing, which felt safer than doing the wrong thing.
Here's what they are, why the difference matters, and exactly which one you should put money into first.
401k
Offered by your employer. You contribute pre-tax money, which lowers your tax bill today. You pay taxes when you withdraw in retirement. Many employers match a percentage of what you put in.
Roth IRA
You open this yourself, separate from your employer. You contribute after-tax money. It grows completely tax-free. You pay nothing when you withdraw in retirement. There are income limits.
The thing most people miss
You don't have to choose one. You can use both. The question is which one to prioritize first. If your employer offers a match, many financial advisers suggest contributing enough to capture it — that match is additional compensation from your employer. Please consult a qualified financial adviser about what approach fits your situation.
At $95,000/year, you're eligible for a Roth IRA. Use it.
Estimated tax reduction from maxing your 401k
$2,090/year
That is money that would have gone to taxes, working for you instead.
Based on 2026 IRS limits. Income limits shown are for Roth IRA contributions. Not tax advice.
Yes. They are completely separate accounts. Most people who are investing well use both. The 401k reduces your taxes today. The Roth IRA protects you from taxes in the future.
Open a Roth IRA and put money there first. You can contribute up to $7,000 a year in 2026 if you're under 50. That is $583 a month. If you can do that, you're doing great.
You can still get there through what's called a backdoor Roth conversion. It's a legal workaround that high earners use. Max your 401k first, then look into the backdoor option with a tax advisor.
Put in whatever you can. Even $50 a month in a Roth IRA is $50 that compounds tax-free for decades. The amount matters less than starting. You can always increase it later.
Normally when you make money in investments, you owe capital gains tax. In a Roth IRA, that tax is zero. If your account grows from $10,000 to $300,000 over 30 years, you keep all $300,000.
No more research. No more waiting. We pick the right account, open it for you, and set up recurring contributions.
Join the Private BetaNot financial advice. Handled is not a registered investment adviser. All content on this site is for educational and informational purposes only and does not constitute financial, investment, tax, or legal advice. Past performance does not guarantee future results. Investing involves risk, including the possible loss of principal. Please consult a qualified financial adviser before making any investment decisions.