I absolutely prefer a Roth IRA to a Roth 401(k) for retirement savings. Here’s why.

Unless you are independently wealthy, you need to save and invest for retirement. It’s a major undertaking, of course, but there are a wide variety of retirement savings accounts that can help.

Two of the most commonly used are the IRA and the 401(k), and each of these exists in both traditional and Roth forms. You can open IRA accounts at most good brokerages, while 401(k) accounts are set up at workplaces. Different investors may have different preferred accounts, but my favorite is the Roth IRA. Here’s why.

Image source: Getty Images.

Major retirement savings accounts

Commonly used retirement accounts include IRAs, 401(k)s, 403(b)s, 457s, solo 401(k)s, SEP IRAs, SIMPLE IRAs, and Keogh plans. SEP-IRAs, solo 401(k)s, and SIMPLE IRAs are worth considering, especially if you’re self-employed. If you have an employer, you may have other types of accounts available to you.

With a traditional IRA or traditional 401(k), you get an upfront tax break; the amount you contribute for a particular tax year can be deducted from your taxable income for that year. So if you contribute $7,000 this year, your taxable earnings drop by $7,000, lowering your tax bill.

With a Roth IRA or Roth 401(k), your contributions are made on an after-tax basis. There’s no tax break up front, but if you follow the rules, you can eventually withdraw money from your Roth account tax free! Those who save and invest in these accounts can accumulate hundreds of thousands of dollars in them — and in some cases, millions of dollars. Being able to withdraw all that money in retirement tax-free can be a big and worthwhile deal.

The pros and cons of IRAs and 401(k)s

Here’s a quick rundown of the main pros and cons of IRAs and 401(k)s that will shed light on why I prefer Roth IRAs.

Advantages of IRAs

• Much wider investment menu. Whereas 401(k) accounts typically give you a limited menu of investments to choose from (ideally, including at least one S&P 500 index fund). You can invest in almost any stock in your IRA, plus usually a lot of mutual funds and exchange-traded funds (ETFs).
• Available to most people. To participate in a 401(k), you need an employer that offers one. But anyone with earned income can contribute to an IRA. Even spouses without earned income can contribute.

Advantages of 401(k)s

• Much higher contribution limits. For 2024, the limit is $23,000, plus an additional $7,500 “catch-up” contribution for those over 50, bringing it to $30,500.
• Employer matches. Many employers match contributions to employee 401(k) contributions. A common formula is to match 50% of contributions, up to 6% of salary. So if you earn $100,000 and contribute $6,000, your employer will get another $3,000 — of free money.
• Your ability to participate is not limited by income.
• Contributions are generally made through automatic payroll deductions.
• Roth 401(k)s are not always available.
• Many 401(k) plans allow loans from your account, although this is generally not recommended.

Against IRAs

• Lower contribution limits. For 2024, you can contribute $7,000 to an IRA, plus $1,000 if you’re 50 or older, for a total of $8,000.
• No employer matching contributions.
• Eligibility to contribute to a Roth IRA is phased out at high income levels.
• The ability to claim deductions for traditional IRA contributions is being phased out for some at higher income levels.
• Required Minimum Distributions (RMDs). RMDs are required for traditional IRAs beginning at age 73 and increasing to age 75 in 2033.
• IRAs aren’t always great for investing beginners.

Against 401(k)s

• Limited menu of investments to choose from.
• Little control over fees charged by various investments.
• Required Minimum Distributions (RMDs): RMDs are required for traditional 401(k)s starting at age 73 and increasing until age 75 in 2033.

What is better for me or for you?

You may now be able to guess why I like Roth IRAs. I like having the freedom to invest in whatever stocks or ETFs I want, including growth stocks and dividend paying stocks. (And for those who don’t want to choose, it’s easy to invest in a simple, low-fee index fund in an IRA, too.) With a Roth IRA, I can look forward to tax-free withdrawals in retirement and No I will be required to take RMDs at certain times, giving me more control over the account.

Of course, another account might be more perfect for you. And we should all understand that we can usually save for retirement in more than one account. I had an IRA and a 401(k), but when I became an entrepreneur, I rolled my 401(k) into an IRA. I now have several IRA accounts, both traditional and Roth.

Ideally, strategize how to save and invest for retirement. If you favor IRAs, you might still contribute enough to a 401(k) to at least max out your company match. Then you might max out your IRA contribution, after which you can start contributing to your 401( k). Or crunch the numbers and contribute the appropriate amounts to all your accounts at once.

Above all, make sure you have a good retirement plan in place, and if that intimidates you, consider consulting a financial advisor.