Moved My 401K to a Roth IRA: What's the Difference?

I had two different 401Ks from two different companies. I’ve been hearing a ton of advice about how a Roth IRA is actually a better option right now. I took one of the 401K’s and transferred it to a Roth IRA. This is the difference between a 401K and a Roth IRA:

401K vs ROTH IRA

Feature	401K	ROTH IRA
ELIGIBILITY	Employer offers a plan and some will match a percentage.	Anyone with earned income; Income limits for full contribution eligibility.
ANNUAL CONTRIBUTION LIMITS	$22,500, with a $7,500 catch-up contribution for those 50 or older.	$6,500, with a $7,500 catch-up contribution for those 50 or older.
INVESTMENT CHOICES	Limited to those offered by your employer's plan	Wider range through various brokerage firms
TAXES ON CONTRIBUTIONS	Tax-deductible	Not tax-deductible
TAXES ON QUALIFIED WITHDRAWALS	Taxable as income	Tax-free (contributions & earnings)
EARLY WITHDRAWAL PENALTIES	10% penalty + income tax on earnings	10% penalty + income tax on earnings
REQUIRED MINIMUM DISTRIBUTIONS (RMDS)	Yes, starting at age 73 (except for Roth 401Ks after 2023)	No
ESTATE PLANNING	Subject to income tax, potentially reducing the amount received	Tax-free and subject to certain rules

Here is a more detailed explanation:

ELIGIBILITY

401K:

Availability depends on your employer offering a plan.

Roth IRA:

Anyone with earned income can contribute, regardless of employment status. However, there are income limits for full contribution eligibility.

TAXES

401K:

Contributions are tax-deductible in the year you make them, lowering your taxable income now. However, you'll pay income taxes on withdrawals in retirement.

Roth IRA:

Contributions are not tax-deductible, but qualified withdrawals in retirement are tax-free. This means you pay taxes upfront but enjoy tax-free growth and withdrawals later.

CONTRIBUTION LIMITS

401K:

The annual limit for 2024 is $22,500, with a $7,500 catch-up contribution for those 50 or older.

You can also get employer matching contributions, which is essentially free money.

Roth IRA:

The annual limit for 2024 is lower at $6,500, with a $7,500 catch-up contribution for those 50 or older.

No employer matching is available.

INVESTMENT CHOICES

401K:

Investment choices are limited to those offered by your employer's plan.

Roth IRA:

You have a wider range of investment options through various brokerage firms.

ESTATE PLANNING

401K:

Accounts passed to heirs are subject to income tax, potentially reducing the amount received.

Roth IRA:

Accounts passed on to heirs are tax-free, subject to certain rules.

REQUIRED MINIMUM DISTRIBUTIONS (RMDs)

401K:

You must start taking RMDs at age 73 (except for Roth 401Ks after 2023).

Roth IRA:

No RMDs are required, so your money can continue to grow tax-free indefinitely.

WITHDRAWLS

401K:

Withdrawals from a traditional 401(k) before the age of 59½ are generally subject to a 10% early withdrawal penalty, in addition to regular income tax. There are exceptions, such as for certain medical expenses or a first-time home purchase.

Roth IRA:

Contributions (but not earnings) to a Roth IRA can be withdrawn at any time without penalty. However, to withdraw earnings tax-free, you generally need to be at least 59½ and have had the account for at least five years.

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