Get new articles by email:

Oblivious Investor offers a free newsletter providing tips on low-maintenance investing, tax planning, and retirement planning.

Join over 20,000 email subscribers:

Articles are published every Monday. You can unsubscribe at any time.

Should I Invest in My Roth IRA or 401k?

If you’re like the people I know, you probably don’t have the $40,000 that would be necessary to max out your 401k, your spouse’s 401k, and each of your Roth IRAs every year. As such, you’ve got to prioritize. Here are a few things to keep in mind when choosing between funding a Roth IRA or your 401k at work.

[Note: This article assumes that you don’t have a Roth 401k option at work. If you do, the question mostly comes down to just 401k vs Roth 401k, which is really just a question of your tax bracket now as compared to later. This article also assumes that you’re eligible to contribute to a Roth IRA.]

Does your employer offer a match on 401(k) contributions?

If so, you should at least make sure to contribute as much as is necessary to receive the maximum contribution from your employer.

This is one of the few times in the world of investing that conventional wisdom is spot on: Employer matches really are free money. Don’t throw them away!

What if your employer doesn’t offer a match?

Once you’ve maxed out your employer match–or if there’s no match to take advantage of–it becomes a more difficult question. I’d focus primarily on the following two factors:

  • Your current tax bracket as compared to your future tax bracket
  • Quality of investment options in your 401k

Tax considerations:

The precise calculation is a bit more complicated, but in general, if you expect to be in a higher tax bracket when you retire than you’re in at the moment, a Roth IRA will give you better tax consequences for your investments than a 401k.

Granted, this question is impossible to answer with perfect confidence, as we all know that tax rates are not permanent. Rather, they’re set by politicians, and every politician seems to have a different idea about precisely how each dollar of income should be taxed.

Quality of Investment Options in Your 401k

If you decide that it’s better from a tax perspective to invest via your 401k, it’s still a good idea to make sure there are some suitable investment options before just jumping in. (For guidance, take a look at my article from earlier this week about how to choose funds in your 401k.)

New to Investing? See My Related Book:


Investing Made Simple: Investing in Index Funds Explained in 100 Pages or Less

Topics Covered in the Book:
  • Asset Allocation: Why it's so important, and how to determine your own,
  • How to to pick winning mutual funds,
  • Roth IRA vs. traditional IRA vs. 401(k),
  • Click here to see the full list.

A Testimonial:

"A wonderful book that tells its readers, with simple logical explanations, our Boglehead Philosophy for successful investing." - Taylor Larimore, author of The Bogleheads' Guide to Investing
Disclaimer: By using this site, you explicitly agree to its Terms of Use and agree not to hold Simple Subjects, LLC or any of its members liable in any way for damages arising from decisions you make based on the information made available on this site. The information on this site is for informational and entertainment purposes only and does not constitute financial advice.

Copyright 2024 Simple Subjects, LLC - All rights reserved. To be clear: This means that, aside from small quotations, the material on this site may not be republished elsewhere without my express permission. Terms of Use and Privacy Policy

My Social Security calculator: Open Social Security