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Although saving and investing for retirement looks different for everyone, the end goal is typically the same for most people: ensure you have enough saved to have as financially stress-free of a retirement as possible.
Most people’s default way to save for retirement is a 401(k) because it’s offered through their employer and can be done passively. However, a 401(k) isn’t the only retirement account you should embrace. A Roth IRA can be a great complement to a 401(k).
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Each has its pros and cons, but I must admit that I prefer a Roth IRA over a 401(k) because of three key benefits: tax-free withdrawals in retirement, tons of investment options, and early withdrawal exceptions.
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A unique tax break that could potentially save you thousands
One thing that separates a Roth IRA from a 401(k) or traditional IRA is the tax break you receive. In a Roth IRA, you contribute after-tax dollars and then can receive tax-free withdrawals in retirement. The only criteria are that you must be 59 1/2 years old and made your first contribution at least five years ago.
To see how valuable this tax break can be, let’s assume someone invests $7,000 annually (the most allowed in 2025 for someone younger than 50) and averages 10% annual returns over 25 years.
At the end of that stint, your account balance would be close to $400,700, while only personally contributing $140,000. Since those investments happened in a Roth IRA, the full amount would be yours tax-free, avoiding capital gains taxes on roughly $260,700.
Roth IRAs have a ton of investment options to choose from
Generally speaking, your investment options in a 401(k) will include some or all of the following:
- Your company’s stock (if it’s a public company)
- Market cap-based funds (large, mid, and small)
- Target date funds
- An assortment of bond funds
There are a few exceptions based on your company’s specific plan, but this is typically what most plans offer.
The beauty of an IRA (both Roth and traditional) is that you can invest in almost anything you could in a regular brokerage account. A recent IPO company you’ve been following since its start-up days? Yup. A niche exchange-traded fund on an industry you believe in? You got it. Real estate investment trusts (REITs)? Consider it done.
Admittedly, some people prefer fewer options because it makes investment decisions easier. That’s understandable, and there’s nothing wrong with that. However, if you prefer to be more hands-on and tailor a retirement account to fit your goals and risk tolerance better, the options of a Roth IRA are right up your alley.
Early withdrawal flexibility can come in handy
Ideally, any money you put up and save for retirement will be strictly for retirement. However, life happens; sometimes, your retirement savings need to be tapped into for different reasons.
The typical penalty for withdrawing early from a retirement account is 10%, along with taxes owed on the withdrawn amount. In the case of a Roth IRA, you can withdraw your contributions — but not earnings — at any time, penalty-free.
In addition to being able to withdraw your contributions, a Roth IRA has three key early withdrawal exceptions that a 401(k) doesn’t:
- First home purchase: You can withdraw up to $10,000 for your first home purchase.
- Health insurance premiums: You can withdraw money to pay your health insurance premiums while you’re unemployed.
- Education: Money can be withdrawn for qualified higher education expenses, such as tuition, books, and other campus fees.
In each case, you can contribute to your Roth IRA, allow your money to (hopefully) grow, and then reap the benefits of that growth to help in certain life events.
For example, let’s say you’re saving for a down payment on your first home. Simply saving $10,000 means setting aside that amount. However, if you invest in a Roth IRA, you can reach $10,000 by investing less and letting compound growth close the gap.
Of course, there’s no guarantee that any investment will appreciate, but it shows how the flexibility of a Roth IRA can help you benefit from growth that your account hopefully experiences.
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