Is It Better To Invest In 401K Or Roth IRA? 
A 401 -LRB- k -RRB- and a Roth IRA are two very different retirement plans . The 401 -LRB- k -RRB- is a plan that is established and administered by your employer . The rules for the plan are detailed in a plan document available from your employer . These plans are individualized and may include participation by your employer . Money contributed to your plan by your employer is free money . Free money is the very best kind of money . As a rule of thumb you should consider participating in a 401 -LRB- k -RRB- plan up to the limit that the employer will match . Your contribution and your employers contribution flow into the plan before taxes . That means that the amount you contribute comes out of your paycheck before you get it . As a result there arent any taxes on that portion that goes into the plan . In order to put $ 100 into a plan it might take only $ 75 in reduced income because of the taxes . That is an example , not even a projection . The Roth IRA is an individual plan . You establish a Roth IRA on your own . The money you contribute to the Roth IRA is not deducted from your paycheck and is not deductible from your income tax . The rules for the Roth IRA are in the Internal Revenue Code -LRB- IRC . -RRB- The money in both the 401 -LRB- k -RRB- and the Roth IRA will accumulate and earn free of current income tax . This is a tremendous advantage and should be strongly considered . There is a tax penalty for withdrawing the money prior to age 50.5 years . The Roth IRA might escape the penalty , but the 401 -LRB- k -RRB- will not . When money is withdrawn from the 401 -LRB- k -RRB- the distribution will be taxed as ordinary income . This money has not been taxed previously . It will all be taxed upon distribution . In addition when you reach age 70.5 the government will require minimum distributions each year that force the money in the 401 -LRB- k -RRB- to be taken as ordinary income . Money can be withdrawn from a Roth IRA free of income tax so long as a couple of conditions are met . The Roth IRA is not subject to the minimum required distributions and may be passed to heirs free of income tax . There are rules involved but careful planning can generally avoid income tax altogether on distributed funds . As you can see these plans are different and yet you might want to have both . The 401 -LRB- k -RRB- contributions can be much greater than the Roth IRA . There are also limits on participating in a Roth IRA . Having both tax deferred and tax-free income can give you great flexibility in retirement . 