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If you’re already contributing to your employer’s 401(k), you may be under the impression that you’ve checked off the retirement-saving box from your financial to-dos.
And while you rightfully deserve kudos for making that effort, you also want to keep building your retirement fund (if you can afford to). Matching a 401(k) with a Roth IRA allows you to diversify your savings while also getting exposed to different tax advantages and withdrawal options.
Below, CNBC Select breaks down the differences between these two retirement-saving vehicles and explains why it can be most effective to have both.
A 401(k) and a Roth IRA have significant differences in how you can benefit from each account. Here’s what should be top of mind:
How you qualify
For starters, you need an employer to offer a 401(k) plan in order to have one, while you can open and establish a Roth IRA on your own without an employer’s involvement as long as your income qualifies. Though there are income limits that come with Roth IRAs, high-earners can revert to a loophole to make contributions indirectly through what’s called a backdoor Roth IRA.
Some of the best Roth IRA options are offered by the big-name brokerages like Charles Schwab, Fidelity, Ally Bank and robo-advisors Wealthfront and Betterment.
Charles Schwab
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Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No account minimum for active investing through Schwab One® Brokerage Account. Automated investing through Schwab Intelligent Portfolios® requires a $5,000 minimum deposit
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Fees
Fees may vary depending on the investment vehicle selected. Schwab One® Brokerage Account has no account fees, $0 commission fees for stock and ETF trades, $0 transaction fees for over 4,000 mutual funds and a $0.65 fee per options contract
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Bonus
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Investment vehicles
Robo-advisor: Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ IRA: Charles Schwab Traditional, Roth, Rollover, Inherited and Custodial IRAs; plus, a Personal Choice Retirement Account® (PCRA) Brokerage and trading: Schwab One® Brokerage Account, Brokerage Account + Specialized Platforms and Support for Trading, Schwab Global Account™ and Schwab Organization Account
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Investment options
Stocks, bonds, mutual funds, CDs and ETFs
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Educational resources
Extensive retirement planning tools
Betterment
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Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. For example, Betterment doesn’t require clients to maintain a minimum investment account balance, but there is a ACH deposit minimum of $10. Premium Investing requires a $100,000 minimum balance.
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Fees
Fees may vary depending on the investment vehicle selected, account balances, etc. Click here for details.
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Bonus
Up to $5,000 managed free for a year with a qualifying deposit within 45 days of signup. Valid only for new individual investment accounts with Betterment LLC
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Investment vehicles
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Investment options
Stocks, bonds, ETFs and cash
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Educational resources
Betterment offers retirement and other education materials
Terms apply. Does not apply to crypto asset portfolios.
The tax advantages
Although both a traditional 401(k) and a Roth IRA offer tax breaks, they come at different times. With a 401(k), your contributions get automatically deducted from each paycheck and are not taxed; tax is deferred, meaning your contributions into your 401(k) account are made with pre-tax dollars and you don’t pay taxes until you withdraw. With a Roth IRA, however, you pay taxes upfront with each contribution so withdrawals later on are tax-free.
The Roth 401(k)
In addition to offering you the traditional 401(k), your employer may also give you the choice of a Roth 401(k). Your contributions to a Roth 401(k) are taxed, but your distributions are tax-free (similar to a Roth IRA).
Withdrawal rules
It’s important to point out that you can withdraw your contributions from a Roth IRA at any time without paying tax or penalties. (Withdrawing any earnings you’ve made on your investments in a Roth IRA before age 59 and a half, however, will incur a 10% early withdrawal penalty and may be subject to income taxes; there are some qualifying exceptions). With a 401(k), any early withdrawals before age 59.5 will typically force you to pay penalties and taxes, though there are also hardship exceptions.
How much you can contribute
Lastly, a 401(k) and a Roth IRA have different annual contribution limits. For 2023, the 401(k) limit is $22,500, or $30,000 if you’re age 50 or older, and the total IRA limit is $6,500, or $7,500 if you’re age 50 or older.
If you can afford to fund two retirement accounts simultaneously, having both a 401(k) and a Roth IRA helps you…
Read More: Why You Should Have Both 401(k) And Roth IRA