401(k) vs. Roth IRA in 2025: How to Prioritize Contributions
November 29, 20257 min read
401(k) vs. Roth IRA in 2025: How to Prioritize Contributions
Guide to choosing between 401(k) and Roth IRA in 2025.
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401(k) vs. Roth IRA in 2025: Which Should You Max Out First?
Retirement savers in 2025 face a familiar—but increasingly important—question: should you prioritize maxing out your 401(k) or your Roth IRA? With contribution limits rising and tax laws continuing to shift, choosing the right order can significantly impact long-term wealth. Below is a clear, data-backed framework to help you decide how to allocate your retirement dollars this year.
2025 Contribution Limits at a Glance
401(k) Limits (Traditional or Roth 401(k))
According to the IRS, employee deferral limits for 2025 are:
$23,500 for those under age 50
$31,000 for ages 50–59 and age 64+ (includes $7,500 catch‑up)
$34,750 for ages 60–63 (enhanced catch-up under SECURE 2.0)
Total employee + employer contributions capped at $70,000 for those under 50, $77,500 for 50+, and $81,250 for ages 60–63 (IRS)
Most employers offer a match—commonly 4%–6% of salary—which dramatically boosts the value of the plan.
Roth IRA Limits
Per Fidelity and the IRS, the 2025 Roth IRA contribution limits are:
Once income passes the top of the phaseout range, direct Roth contributions are no longer allowed.
Tax Differences: Pre‑Tax Now vs. Tax‑Free Later
Traditional 401(k)
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Contributions are pre-tax, lowering your taxable income.
Growth is tax-deferred.
Withdrawals in retirement are taxed as ordinary income.
Roth IRA
Contributions are after-tax.
Growth and withdrawals are tax-free after age 59½ and after meeting the 5‑year rule.
No required minimum distributions (RMDs).
Roth 401(k)
Employee contributions made after-tax.
Employer match always goes into a pre-tax bucket.
Subject to RMDs unless rolled over to a Roth IRA.
Your tax bracket today vs. your expected tax bracket in retirement plays a major role in which account benefits you most.
The Golden Rule: Always Take the Full 401(k) Employer Match First
Employer matching contributions are a guaranteed, risk-free return. If your employer matches 50% or 100% of your contributions up to a certain percentage, not capturing that match is leaving free money unclaimed.
Even high-income earners and Roth-maximalists should start here.
Step-by-Step Strategy for 2025
1. Contribute to Your 401(k) Up to the Full Match
A 4%–6% match is equivalent to an immediate 100%–150% return on your contributions—unmatched anywhere in the market.
2. Max Out a Roth IRA (If Eligible)
If your income is below the MAGI thresholds, Roth IRA benefits are compelling:
Tax-free withdrawals
No RMDs
Flexible access to contributions at any time
Wider investment options than most 401(k)s
These perks make the Roth IRA powerful for younger savers and those expecting higher taxes later.
3. Return to the 401(k) and Max It Out
Once Roth IRA contributions are maxed, additional retirement dollars usually go to the 401(k)—traditional or Roth depending on your tax situation.
4. High Earners: Use the Backdoor Roth
If your income exceeds Roth IRA limits, the backdoor Roth IRA remains fully legal and widely used:
Contribute to a nondeductible traditional IRA
Convert to a Roth IRA
Track contributions properly using IRS Form 8606
This is ideal for savers with no or minimal pre-tax IRA balances due to the pro rata rule.
5. Very High Earners: Consider the Mega Backdoor Roth
For savers with access to advanced 401(k) features:
After-tax 401(k) contributions + automatic or manual in‑plan Roth conversion
Allows tax-free Roth growth on up to $70,000–$81,250 in total 2025 contributions
Not all employer plans allow it
Fidelity outlines the mechanics and limitations of the strategy in its guidance on after-tax 401(k) contributions and mega backdoor conversions (Fidelity).
Withdrawal & Access Rules You Should Know
401(k)
Withdrawals before 59½ generally incur a 10% penalty + taxes.
Loans may be allowed by some plans (not available in IRAs).
Required minimum distributions apply beginning at age 73 (unless rolled to a Roth IRA).
Roth IRA
Contributions can be withdrawn anytime, tax- and penalty-free.
Earnings become tax-free after:
Age 59½ and
5-year rule met
No RMDs ever—ideal for estate planning.
Strategy by Age & Circumstance
Under Age 40
Prioritize Roth IRA: decades of tax-free growth are extremely valuable.
Use Roth 401(k) if in a lower tax bracket.
Grab the 401(k) match before everything else.
Ages 40–55
Mix traditional 401(k) and Roth depending on tax bracket expectations.
Max Roth IRA if eligible—especially useful for tax diversification.
Begin planning for backdoor Roth if income rising above limits.
Ages 55–63
Consider maximizing catch-up contributions.
Traditional 401(k) contributions become more attractive for those approaching retirement in a high-income phase.
Evaluate Roth conversions before RMDs begin.
Ages 60–63
Take advantage of enhanced catch-up contributions: up to $34,750 in employee contributions.
If plan allows, mega backdoor Roth becomes especially powerful.
So—Which Should You Max Out First in 2025?
Most savers should follow this order:
401(k) up to employer match
Roth IRA (or backdoor Roth)
Max 401(k)
Mega backdoor Roth (if offered)
This ordering balances tax efficiency, long-term growth, and flexibility—while ensuring you capture all available free employer contributions.
Final Thoughts
There is no one-size-fits-all solution, but understanding the 2025 limits, tax rules, and strategic order of contributions will help you maximize every dollar you save. With higher catch-up allowances, rising MAGI thresholds, and more employer Roth 401(k) options, smart planning is more valuable than ever.
Use guidance from reliable sources—including the IRS, Fidelity, and Vanguard—to ensure you’re making fully informed decisions as you build your retirement plan for 2025 and beyond.