Graduating college is an exciting milestone, but it also marks the start of serious financial planning. One of the biggest decisions young professionals face in the U.S. is where to save for retirement. Two of the most common options are the 401(k) and the Roth IRA.
Both accounts help you build long-term wealth, but they work differently—and choosing the right one can save you tens of thousands of dollars over your lifetime.
This article will explain how each account works, compare the pros and cons, and help you decide which option is best for your situation.
What Is a 401(k)?
- Employer-sponsored retirement plan.
- Contributions are taken directly from your paycheck.
- Contribution limit (2025): $23,000/year (higher if over 50).
- Many employers offer a match (e.g., they contribute 50 cents for every $1 you put in, up to 6% of your salary).
Tax advantage:
- Traditional 401(k): Contributions are pre-tax, lowering your taxable income. You pay taxes when you withdraw in retirement.
- Roth 401(k): Contributions are after-tax, but withdrawals in retirement are tax-free.
What Is a Roth IRA?
- Individual Retirement Account you open yourself (not tied to employer).
- Contribution limit (2025): $7,000/year (higher if over 50).
- Contributions are made with after-tax dollars.
- Withdrawals in retirement (contributions + growth) are tax-free.
Income limits (2025):
- Full contribution allowed if you earn under ~$153,000 (single filer).
- Contribution phases out above that.
Key Differences
| Feature | 401(k) | Roth IRA |
|---|---|---|
| Contribution limit | $23,000/year | $7,000/year |
| Employer match | Yes (if offered) | No |
| Tax treatment | Pre-tax (Traditional) or after-tax (Roth) | After-tax only |
| Investment options | Limited (employer’s chosen funds) | Flexible (stocks, ETFs, mutual funds) |
| Early withdrawal | Penalties before 59½ (some exceptions) | Contributions can be withdrawn anytime (earnings penalized before 59½) |
| Who controls account | Employer | You |
Which One Should You Choose?
Start with a 401(k) (if employer match is available)
- If your employer offers matching contributions, this is free money—always take it.
- Example: You earn $50,000, contribute 6% ($3,000), and your employer matches 3% ($1,500). That’s an immediate 50% return on your contributions.
Add a Roth IRA
- Once you’ve contributed enough to get your full employer match, consider opening a Roth IRA.
- This diversifies your retirement tax strategy (some pre-tax money, some post-tax).
If No Employer Match
- Prioritize a Roth IRA for tax-free growth and more control.
- Once maxed out, put additional savings into a 401(k) if available.
Case Study Examples
Case 1: New Grad With Employer Match
- Salary: $45,000.
- Employer matches 4%.
- Best move: Contribute 4% to 401(k) → open Roth IRA for additional savings.
Case 2: Freelancer or Self-Employed Grad
- No 401(k) option.
- Best move: Open Roth IRA first → later explore a Solo 401(k) or SEP IRA.
Case 3: High-Income Young Professional
- Salary: $100,000+.
- Best move: Max employer 401(k) match → Roth IRA if under income limit → additional 401(k) contributions if possible.
Common Mistakes to Avoid
- Ignoring free employer match money.
- Thinking retirement is “too far away” to start saving.
- Only contributing the minimum instead of gradually increasing.
- Forgetting about fees in 401(k) funds.
Conclusion
Both the 401(k) and Roth IRA are powerful retirement tools. For most young professionals, the best strategy is to:
- Take advantage of your employer’s 401(k) match.
- Open a Roth IRA for tax-free growth.
- Gradually increase contributions as your income rises.
Bottom line: Start now—even small contributions in your 20s can grow into millions by retirement.