Comparing Contribution Limits: Roth 401(k) vs. Roth IRA (2024)

If you have access to a 401(k) from your employer, you may have the choice of putting your money into a traditional or a Roth 401(k). If you're self-employed or have freelance income, you can save for your retirement through an individual retirement account (IRA), choosing a Roth or a traditional IRA,

The big difference is in the amount of money you can save in each of these tax-advantaged retirement accounts. The figures are adjusted for inflation every year. The contribution limits for IRAs and 401(k)s are the same whether the account is a Roth or a traditional version.

Roth 401(k)

The Roth401(k) has only been available since 2006. Modeled after theRoth IRA, theRoth401(k)provides investors an opportunity to save retirement funds in a tax-advantaged account.

Unlike its traditional counterpart, the Roth401(k)account is funded with after-tax instead of pre-tax dollars. That means you won't receive a tax deductionfor your contributions to a Roth 401(k), but down the road, you won't owe any tax onyour qualified distributions.

Offering a Roth 401(k) (or Roth 403(b), for non-profit organizations) is voluntary for employers. To offer such a plan, employers must have a traditional 401(k) plan in place, and they must set up a tracking system to segregate Roth assets from those of traditional 401(k) assets. This may be an expensive proposition, and your employer may choosenotto do it.

An employer may match contributions to a Roth 401(k). In fact, if an employer matches a traditional 401(k) plan contribution, it is standard for it to match one for a Roth 401(k). But unlike the employee's contribution, the employer's contribution is placed into a traditional 401(k) plan. That means the employer's match will be taxable when the money is withdrawn.

Roth 401(k) Contribution Limits

As noted above, the contribution limits are adjusted for inflation each year. The limits for Roth 401(k)s are as follows:

• The 2023 maximum contribution to a Roth 401(k) is $22,500. The catch-up contribution is $7,500.
• The 2024 maximum contribution to a Roth 401(k) is $23,000. The catch-up contribution is $7,500.
  

Roth IRA

Named after Delaware Senator William Roth, and established by the Taxpayer Relief Act of 1997, a Roth IRA is an individual retirement plan (a type of qualified retirement plan) that bears many similarities to thetraditional IRA. The biggest distinction between the two is how they’re taxed.

Traditional IRA contributions are generally made with pre-tax dollars;you usually get a tax deduction on your contributionand pay income tax when you withdraw the money from the account after retiring.

However, Roth IRAs are funded with after-tax dollars. The contributions are not usually tax-deductible. Taxpayers with moderate incomes may be eligible for a Saver's Tax Creditof 10% to 50% of the contribution.

But once you start withdrawing funds from a Roth IRA, qualified distributions are tax-free.

IRAs, whether Roth or traditional, are not available through employers. They can be opened by any taxpayer who has earned income and are available at most banks, brokerages, and other financial institutions.

Roth IRA Contribution Limits

The following are the contribution limits for Roth IRAs for 2023 and 2024:

• For 2023, the maximum allowable contribution for a Roth IRA is $6,500. Individuals aged 50 and over can contribute an additional $1,000 as a catch-up contribution for a total of $7,500.
  
• For 2024, the Roth IRA contribution limit increases to $7,000. The catch-up contribution amount remains the same at $1,000 for a total of $8,000.
  

How the Contribution Limits Work

Contribution limits change each year and are published by the Internal Revenue Service (IRS) annually:

• In the 2023 tax year, you can save up to $22,500 in a 401(k). If you're age 50 or older, you can add up to $7,500 as a catch-up contribution. This means you can invest a total of $30,000 if you are 50 or older.
• For the 2024 tax year, you can save a maximum of $23,000 in a Roth 401(k). The catch-up amount remains the same at $7,500. So people 50 and older can invest $30,500.
• If you have a Roth IRA, the maximum in 2023 is $6,500. If you're 50 or older, you can add another $1,000 for a total contribution of $7,500.
  
• For a Roth IRA account, the 2024 maximum is $7,000. The catch-up contribution remains the same at $1,000, which allows a total contribution of $8,000.

Mixing Roth and Traditional

The contribution limits are the same for Roth and traditional versions of 401(k)s and IRAs.

If you want to contribute to both a Roth and a traditional 401(k), the maximum amounts remain the same. You can split your contributions between accounts in any way you like.

One financial strategy, for those who want to maximize their tax-advantaged savings: Open both types of Roth accounts. You can invest up to the combined allowable limits in a Roth 401(k) and a Roth IRA.

Roth IRA Income Limits

With Roth IRAs, there are limits to what you can contribute or even whether you can have one at all, based on your income. Generally, the higher it is, the more restricted your contributions. The Roth 401(k) has no income limits. That means you don’t have to worry about your access to a Roth account phasing out as your income rises.

Overall contributions to a Roth 401(k) can't exceed your compensation, of course. The combined total of employee and employer contributions cannot exceed the lesser of:

• 100% of the account holder's compensation
• $66,000 or $73,500 if you’re aged 50 or older in 2023
• $69,000 or $76,500 for people 50 or over in 2024
  

Roth Rollovers

If you are getting a new job, you might be considering rolling over your current Roth 401(k) into a new or existing Roth IRA account.

When it comes to rollovers, there is no contribution limit; you can transfer whatever is in your account. Just be sure to have the old account's trustee or manager directly roll over the money to the new account, or at least make sure the check is made out to the new manager as the account trustee.

If the money is paid into your hands personally, you could be required to pay a tax penalty.

The Bottom Line

Contribution limits on all tax-advantaged accounts are indexed to inflation. This means the IRS re-evaluates and revises the maximum amounts people can contribute to IRAs and 401(k)s each year. If you’re contributing near the maximum allowed, be sure you stay on top of the annual limits.