Roth IRA vs 401(k): Complete Comparison for Business Owners

Choosing between a Roth IRA and 401(k) isn’t an either/or decision. For most business owners, the right answer is both. But understanding when each account shines helps you prioritize contributions when cash flow is tight.

The real question isn’t “which is better?” It’s “how much should I put in each, and in what order?”

This guide breaks down the key differences, 2026 limits, income thresholds, and business owner-specific strategies for combining both accounts.

Should you prioritize a Roth IRA or 401(k) for retirement savings?

For most business owners, prioritize your 401(k) first up to any employer match, then max out your Roth IRA ($7,500 in 2026, or $8,600 if 50+), then return to the 401(k) to maximize contributions. The 401(k) offers higher limits ($24,500-$35,750 depending on age) and no income restrictions, while the Roth IRA provides tax-free growth with income limits starting at $153,000 single/$242,000 married filing jointly. Business owners with a Solo 401(k) can contribute as both employee and employer, potentially sheltering $72,000+ annually. Use both accounts for tax diversification.

Key Takeaways

• 401(k) limits are 3x higher – $24,500 vs $7,500 in 2026 for employee deferrals; Solo 401(k) owners can add employer contributions up to $72,000
• Roth IRA has income limits; 401(k) does not – Roth IRA phases out starting at $153,000 (single) or $242,000 (MFJ); no income limit for Roth 401(k)
• Backdoor Roth IRA bypasses income limits – High earners can still fund Roth IRA through the backdoor strategy (watch the pro-rata rule)
• Do both for tax diversification – Having pre-tax and Roth balances gives flexibility in retirement to manage tax brackets
• Solo 401(k) + Roth IRA is the power combo – Business owners can max both accounts, sheltering $79,500+ in tax-advantaged space (under 50)
• Order matters – Capture any employer match first, then Roth IRA, then back to 401(k)

Side-by-Side Comparison

Key insight: These accounts aren’t competitors. They serve different purposes and can be used together.

2026 Contribution Limits

Roth IRA Limits

The IRA limit increased from $7,000 in 2025 to $7,500 in 2026. Catch-up contributions rose from $1,000 to $1,100.

401(k) Limits

For Solo 401(k) owners, you contribute as both employee (deferral) and employer (profit sharing), dramatically increasing your total contribution capacity.

See our Solo 401(k) Roth contributions guide for details on maximizing contributions as a business owner.

Roth IRA Income Limits for 2026

Unlike 401(k) plans, Roth IRA contributions are subject to income phase-outs.

Single or Head of Household

Married Filing Jointly

Married Filing Separately

Important for business owners: Your MAGI includes K-1 income from partnerships and S-Corps. High-income business owners often exceed these limits, making the backdoor Roth IRA strategy essential.

The Backdoor Roth IRA Solution

If your income exceeds the limits, the backdoor Roth IRA lets you:

1. Contribute to a traditional IRA (no deduction taken)
2. Convert to Roth IRA
3. Pay tax only on earnings (minimal if converted quickly)

This strategy works regardless of income. But watch the pro-rata rule if you have existing pre-tax IRA balances.

Roth IRA vs Roth 401(k): What’s the Difference?

Both offer tax-free growth and withdrawals. The key differences:

Strategy: Many business owners contribute to both. The Roth 401(k) offers higher limits and no income restrictions. The Roth IRA offers more flexibility and no RMDs.

You can roll Roth 401(k) balances to a Roth IRA at retirement to eliminate RMDs on that money.

See our Roth 401(k) vs Traditional 401(k) comparison for the traditional vs Roth decision within your 401(k).

Business Owner Strategies

Solo 401(k) + Roth IRA: The Power Combo

As a business owner with self-employment income, you can contribute to both:

Solo 401(k) capacity (under 50):

• Employee deferral: $24,500
• Employer profit sharing: Up to 25% of compensation
• Total possible: $72,000

Plus Roth IRA (under 50):

• Additional: $7,500

Combined tax-advantaged space: $79,500 per year

For ages 60-63, this jumps to $91,850 ($83,250 + $8,600).

S-Corp Salary Coordination

Your S-Corp salary affects both:

1. Solo 401(k) ceiling – Employee deferrals can’t exceed 100% of compensation; employer contributions are based on salary
2. Roth IRA income limit – K-1 income plus salary determines MAGI

The coordination challenge:

• Higher salary = more 401(k) room but more payroll tax
• Lower salary = less payroll tax but less 401(k) room

Our S-Corp reasonable compensation guide walks through the optimization calculation.

Partnership Income Considerations

Partnership K-1 income counts toward your MAGI for Roth IRA eligibility. A profitable year might push you over the income limit.

For partnership owners, consider:

• Backdoor Roth IRA regardless of income (avoids the phase-out calculation)
• Roth contributions within any employer 401(k) (no income limits)
• Individual 401(k) if you have other self-employment income

See our partnership tax planning strategies for more on coordinating retirement contributions with K-1 income.

When to Prioritize Roth IRA

You’re Below the Income Limits

If your MAGI is under the phase-out ($153,000 single / $242,000 MFJ), direct Roth IRA contributions are simple and valuable.

You Want Contribution Flexibility

Roth IRA contributions (not earnings) can be withdrawn anytime, penalty-free. This makes it a more flexible savings vehicle for business owners who might need emergency access.

You Don’t Have a 401(k) Yet

Setting up a Solo 401(k) takes time and paperwork. If you’re in the early stages of your business, starting with a Roth IRA (or backdoor Roth IRA) gets you contributing immediately.

No RMDs in Retirement

Roth IRAs have no required minimum distributions for the original owner. You can let the account grow tax-free for decades. This is valuable for estate planning.

When to Prioritize 401(k)

You Need the Tax Deduction Now

Traditional 401(k) contributions reduce current-year taxable income. In a high-income year, this can:

• Lower estimated tax payments
• Keep you in a lower bracket
• Offset unexpected K-1 income

You Want Higher Contribution Limits

$24,500 (or $35,750 with enhanced catch-up) in a 401(k) vs $7,500 in an IRA. If maximizing tax-advantaged savings is the goal, 401(k) is the bigger bucket.

You’re Over the Roth IRA Income Limits

Direct Roth IRA contributions aren’t allowed above the income thresholds. While backdoor Roth works, the 401(k) has no income limits for either traditional or Roth contributions.

You Want the Mega Backdoor Roth

If your 401(k) allows after-tax contributions plus in-plan Roth conversions, you can funnel up to $72,000 into Roth-type accounts (far exceeding the IRA limit).

See our backdoor Roth vs Mega Backdoor Roth comparison.

The Optimal Contribution Order

For most business owners, follow this sequence:

Step 1: Capture any employer match If you have employees and offer matching, ensure you’re getting the full match. That’s 100% return on investment.

Step 2: Max out Roth IRA $7,500 in tax-free growth is valuable. If over income limits, do backdoor Roth IRA (if no pro-rata issues).

Step 3: Return to 401(k) and max out Fill the remaining 401(k) space. Choose traditional or Roth based on current vs future tax rate expectations.

Step 4: Consider Mega Backdoor Roth If your plan allows and you have additional capacity, after-tax contributions with in-plan conversion can add significant Roth savings.

Step 5: Taxable brokerage After maxing tax-advantaged accounts, taxable accounts offer flexibility (no contribution limits, no penalties).

Alternative Order: High Current Tax Bracket

If you’re in the 32%+ bracket and need deductions:

1. Max traditional 401(k) first (get the deduction)
2. Backdoor Roth IRA ($7,500)
3. Consider whether remaining funds should stay in the business vs taxable investing

Pro-Rata Rule Warning

If you have existing pre-tax IRA balances (traditional IRA, SEP-IRA, SIMPLE IRA), the backdoor Roth conversion becomes taxable proportionally.

Example:

• $45,000 in traditional IRA (pre-tax)
• $7,500 non-deductible IRA contribution
• Total IRA: $52,500
• Pre-tax percentage: 86%
• Taxable on $7,500 conversion: $6,450 (86%)

Solutions:

• Roll pre-tax IRA into 401(k) before backdoor Roth
• Roll SEP-IRA into Solo 401(k) (then clean backdoor Roth)
• Accept the partial tax and convert anyway

See our complete pro-rata rule guide for strategies to avoid this issue.

Contribution Limits Summary

For details on Roth IRA contribution limits, see our dedicated guide.

Frequently Asked Questions

Can I contribute to both a Roth IRA and a 401(k) in the same year?

Yes. These accounts have separate contribution limits. You can contribute up to $7,500 to a Roth IRA and up to $24,500 to a 401(k) in 2026 (plus catch-up if eligible). The limits don’t combine or reduce each other.

Should I max out my 401(k) before contributing to a Roth IRA?

Not necessarily. The common advice is: capture any employer match first, then max Roth IRA for tax-free growth, then return to 401(k). However, if you’re in a high tax bracket and need the deduction, prioritizing traditional 401(k) may make more sense.

What if I exceed the Roth IRA income limit?

Use the backdoor Roth IRA: contribute to a non-deductible traditional IRA, then convert to Roth. This works at any income level. Just watch the pro-rata rule if you have existing pre-tax IRA balances.

Is Roth 401(k) the same as Roth IRA?

No. Both offer tax-free growth and qualified withdrawals, but they differ in contribution limits ($24,500 vs $7,500), income restrictions (none for Roth 401(k)), RMD requirements (Roth 401(k) has RMDs; Roth IRA doesn’t), and access flexibility.

Which is better for business owners: Solo 401(k) or SEP-IRA?

Solo 401(k) is usually better because it allows both employee deferrals and employer contributions, offers Roth option, permits Mega Backdoor Roth (if designed correctly), and allows loans. SEP-IRA is simpler but only allows employer contributions.

Do 401(k) contributions reduce my income for Roth IRA eligibility?

Traditional (pre-tax) 401(k) contributions do NOT reduce MAGI for Roth IRA eligibility purposes. Your MAGI is calculated before 401(k) deferrals. High earners can’t contribute enough to a traditional 401(k) to become eligible for direct Roth IRA contributions.

Can I do a backdoor Roth if I have a Solo 401(k)?

Yes, and it’s often cleaner. You can roll any existing traditional/SEP IRA balances into your Solo 401(k), which removes them from the pro-rata calculation. Then your backdoor Roth IRA conversion has no tax consequence (beyond any minimal gains).

What happens to my Roth IRA if my income drops below the limit?

You can make direct Roth IRA contributions in any year your MAGI is below the phase-out. There’s no lookback or averaging. Each year is evaluated independently.

Get Your Retirement Strategy Right

Not sure how to coordinate your Roth IRA and 401(k) contributions? Schedule a tax planning consultation and we’ll analyze your income, business structure, and retirement goals to recommend the optimal allocation.

Our tax advisory services include year-round retirement strategy as part of comprehensive planning. For a complete view of retirement tax strategies, see the Retirement Tax Planning Hub.

Related Guides:

• Retirement Tax Planning Hub
• Roth 401(k) vs Traditional 401(k)
• Solo 401(k) Roth Contributions
• Backdoor Roth vs Mega Backdoor Roth
• Pro-Rata Rule Explained
• Roth IRA Contribution Limits
• S-Corp Reasonable Compensation Guide
• Partnership Tax Planning Strategies