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Roth 401(k) vs. Roth IRA: Which One Wins for Real Estate Investors Near Retirement?

The Roth 401(k) and Roth IRA both provide tax-free growth and tax-free qualified withdrawals, but differ significantly in contribution limits, income eligibility, required minimum distributions, and investment options. For real estate investors with higher incomes approaching retirement, the Roth 401(k) eliminates the income phase-out limitation that prevents high earners from contributing to a Roth IRA directly.

By Rich Arzaga, CFP®, CCIM

The Real Estate Whisperer® Financial Planning

| 4 min read

I discussed this topic recently with a client in his late 50s, a physician who also owns several rental properties. He wanted to maximize Roth contributions heading into retirement and assumed the Roth IRA was his only option. When I explained that his 401(k) plan also offered a Roth designation, and that it had significantly higher contribution limits without an income cap, it changed his planning meaningfully.

The Key Differences

Contribution Limits

The Roth IRA contribution limit for 2025 is $7,000 ($8,000 if you're 50 or older). The Roth 401(k) follows the 401(k) contribution limit: $23,500 ($31,000 with catch-up contributions at 50 or older). For someone trying to maximize tax-free retirement savings, that's a significant difference.

Income Limits

Roth IRA contributions phase out at higher income levels, in 2025, phaseout begins at $150,000 for single filers and $236,000 for married filing jointly. The Roth 401(k) has no income limit. Anyone eligible for a 401(k) can make Roth contributions, regardless of income.

High earners who can't contribute to a Roth IRA directly can often make Roth contributions through their 401(k), and contribute three times as much.

Required Minimum Distributions

Traditional Roth IRAs have no lifetime required minimum distributions (RMDs), a significant advantage for estate planning. Prior to the SECURE 2.0 Act, Roth 401(k)s were subject to RMDs starting at 73. SECURE 2.0 eliminated RMDs from Roth 401(k)s starting in 2024, effectively leveling this important distinction.

Investment Options

Roth IRAs offer the broadest investment flexibility, including real estate through a self-directed IRA structure. Roth 401(k) investment options are limited to what the employer plan offers, typically a menu of mutual funds or ETFs. For real estate investors who want to hold property within a retirement account, a self-directed IRA is the vehicle, the 401(k) won't get you there.

If you want to hold real estate inside a retirement account, only a self-directed IRA allows it, not a 401(k) of any variety.

Which One Is Right for You?

For most high-income real estate investors, the answer is both, maximize Roth 401(k) contributions through your employer plan, and also fund a Roth IRA via backdoor conversion if income limits are a barrier. The goal is to build the largest possible tax-free bucket in retirement, where property-generated income, Social Security, and portfolio distributions can be managed with maximum flexibility.

Frequently Asked Questions

What is the difference between a Roth 401(k) and a Roth IRA?
Both offer tax-free growth and withdrawals. The Roth 401(k) has higher contribution limits and no income restrictions, but investment options are limited to the employer plan menu. The Roth IRA has lower limits and income phase-outs, but offers broader investment flexibility including self-directed real estate options.
Can high earners contribute to a Roth IRA?
Not directly, if income exceeds the phase-out thresholds ($150,000 single / $236,000 married filing jointly in 2025). However, high earners can use the backdoor Roth IRA strategy, making a non-deductible traditional IRA contribution and then converting it to a Roth. They can also contribute to a Roth 401(k) without any income limit.
Does a Roth 401(k) require minimum distributions?
As of 2024 (following SECURE 2.0), Roth 401(k) accounts are no longer subject to required minimum distributions during the owner's lifetime, aligning them with Roth IRAs on this important planning dimension.
Can you hold real estate in a Roth 401(k)?
No. Roth 401(k) investments are limited to the options offered by the employer's plan, typically mutual funds and ETFs. Real estate can be held in a self-directed Roth IRA, which allows a broader range of alternative investments including direct property ownership under specific IRS rules.

About Rich Arzaga, CFP®, CCIM

Rich Arzaga is the founder of The Real Estate Whisperer® Financial Planning and creator of The Real Estate Income Lab® and The 5% Real Estate Performance Gap®. He provides comprehensive, flat-fee financial advice that brings investment real estate together with retirement, investments, taxes, insurance, estate planning and the rest of a client's financial life.

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