Getting Started

Why over 20% of Gen Z use a Roth IRA or 401(k)—and should you? Learn why Roth accounts offer tax-advantaged growth, higher contribution limits, and no income cap — and why they can be a good place to start. Roth accounts are popular among new investors. Around 25% of Gen Z use a Roth IRA and over 20% of Gen Z are choosing to use a Roth 401(k). In fact, Gen Z is more likely than any other generation to use a Roth 401(k). So, why are Roth accounts popular? Roth IRAs and Roth 401(k)s offer something that traditional IRAs and 401(k)s don’t… The chance to pay taxes on your contributions now at today's rates, and potentially avoid federal income taxes on qualified withdrawals later—including any earnings—if IRS requirements are met. This guide breaks down exactly what Roth IRAs and Roth 401(k)s are, how they compare to traditional accounts, and how to decide whether they make sense for your situation. What are Roth IRA and Roth 401(k) accounts—and what are the tax advantages? Roth IRAs and Roth 401(k)s are retirement accounts funded with after-tax dollars—meaning: You don't receive an upfront tax deduction Earnings can go tax-deferred Qualified withdrawals in retirement are free of federal income tax, including investment gains, if IRS rules are met (state and local tax treatment may vary) The key difference is access: A Roth IRA is opened independently through a brokerage or investing platform and gives you a wider range of investment options. A Roth 401(k) is employer-sponsored with higher contribution limits and includes the potential for matching contributions from your employer. Do Roth accounts grow tax-free? They can offer tax-free treatment on qualified withdrawals. You typically won’t owe federal income tax on growth or withdrawals if both of the following are true: You're at least 59½ years old The account has been open for at least five years Meet those requirements and, in general, your contributions and any earnings can be withdrawn without federal income tax. For example, a 25-year-old who starts contributing has the potential for decades of tax-advantaged growth. Roth IRA vs. Roth 401(k) vs. traditional 401(k): What's the difference? Three accounts, two tax structures. Here's how they compare: Roth IRA Roth 401(k) Traditional 401(k) 2026 contribution limit $7,500 $24,500 $24,500 Income limits Yes — phases out starting at $153,000(single) and $242,000 (married) None None Tax on contributions After-tax (no deduction) After-tax (no deduction) Pre-tax (reduces taxable income) Tax on qualified withdrawals Generally tax-free (if IRS requirements are met) Generally tax-free (if IRS requirements are met) Taxed as ordinary income Employer match eligible No Yes Yes Required min. distributions No No Yes (age 73) May be a good fit for Flexible complement; more withdrawal control Earlier-career investors expecting higher taxes later Higher earners now who expect a lower bracket in retirement Roth 401(k) vs. traditional 401(k): With a traditional 401(k), contributions are generally made pre-tax, and you’ll owe ordinary income tax on withdrawals in retirement. With a Roth 401(k), contributions are made after-tax, and qualified withdrawals in retirement are generally free from federal income tax if IRS requirements are met (state and local tax treatment may vary). Roth IRA vs. Roth 401(k) — the key practical differences: The Roth 401(k) contribution limit in 2026 is $24,500—nearly three times the $7,500 Roth IRA limit. The Roth 401(k) has no income restrictions; Roth IRA eligibility phases out for single filers at ~$150,000–$165,000 and married filers at ~$236,000–$246,000. If your income exceeds those thresholds, the Roth 401(k) may be your only direct path to Roth-style tax-advantaged savings. One important note: Employer matching contributions have traditionally gone into a pre-tax (traditional) account, though some plans now allow Roth matching contributions under SECURE 2.0. Check with your employer or plan administrator to confirm how your match is treated. Should you choose a Roth IRA or 401(k) in your 20s? Here's how to decide For most people early in their careers, the Roth IRA or Roth 401(k) can be a good option. Your current tax rate is likely lower than it will be at peak earning years, so paying taxes now and taking qualified tax-advantaged withdrawals in retirement can work strongly in your favor. A simple framework for choosing: Choose a Roth IRA if: you're within the income eligibility limits (under $153,000 MAGI for single filers/under $242,000 for joint filers in 2026), want more investment options than your employer's plan offers, or want the flexibility to withdraw contributions penalty-free before retirement—the 2026 contribution limit is $7,500 for those under 50, or $8,600for those 50 and older. Choose a Roth 401(k) if: you're in the 12% or 22% tax bracket, expect your income to grow significantly, or want tax-advantaged income in retirement—with no income limits restricting your contributions and an individual contribution limit of $24,500 in 2026. Additionally, choose a Roth 401(k) to get your employer’s matching contributions if available. Choose a traditional 401(k) if: you're in a high tax bracket today and expect lower taxes in retirement. Consider splitting if: you're uncertain, or want a mix of pre-tax and tax-advantaged income options at retirement. Many investors contribute to both a Roth IRA and a traditional or Roth 401(k) simultaneously. Roth IRA contribution and income limits for 2026 Here's what you need to know about how much you can contribute: Standard limit: $7,500 for employees under 50 Catch-up (age 50+): $8,600 Super catch-up (ages 60–63): an additional $1,100 Income limits: You can make a full contribution if your single salary is under $153,000. Learn more Roth 401(k) contribution and income limits for 2026 Here's what you need to know about how much you can contribute: Standard limit: $24,500 for employees under 50 Catch-up (age 50+): an additional $7,500 Super catch-up (ages 60–63): an additional $11,250 Income limits: None—any employee in an eligible 401(k) plan can choose the Roth option regardless of salary Combined limit: The contribution limit covers your combined Roth and traditional 401(k) contributions—your employer match doesn't count toward it No income limit is a major advantage over the Roth IRA. High earners who are ineligible for a Roth IRA can still access the same tax-advantaged growth benefits through their employer's Roth 401(k). How Betterment helps you make the most of your 401(k) If your employer uses Betterment to power their 401(k), you're working with a platform built for smart, easy investing. Here's what that means for you: Automated portfolio management: Your investments are managed based on your goals and timeline, without you having to pick individual funds Personalized goal-setting tools: See projections of where your retirement balance could go and adjust your contributions accordingly Built-in financial guidance: Help navigating Roth vs. traditional allocation, contribution rate decisions, and more — built directly into the platform Ready to make the most of your retirement plan? Add a Roth 401(k) to your account or explore the Betterment employee financial planning hub. Frequently asked questions Q: What are the benefits of a Roth 401(k) for new investors? The biggest benefits are: Qualified retirement withdrawals may be federally tax-free if IRS requirements are met (state and local taxes may vary) A higher contribution limit than a Roth IRA No income restrictions — open to all plan participants regardless of salary New investors typically start in lower tax brackets, making it advantageous to lock in today's rate Q: Is a Roth IRA or Roth 401(k) good for beginners? Both can be excellent starting points — and for many beginners, they're not mutually exclusive. If your employer offers a Roth 401(k) with a match, start there and contribute at least enough to capture the full match. Then, if you're within the income limits, consider opening a Roth IRA to complement it with more investment flexibility. For beginners without access to a workplace plan, a Roth IRA can be a good option for a first account. The contribution limits are lower ($7,500in 2026), but you'll have a wider range of investment options and the ability to withdraw your contributions—not earnings—penalty-free if you ever need the funds. Most importantly, both accounts are tax-advantaged, which can be a powerful benefit when you have decades of compounding ahead of you. Q: Should I choose a Roth 401(k) in my 20s? For most people in their 20s, yes. If your tax rate is lower now than you expect it to be later, paying taxes today and targeting tax-free qualified withdrawals in retirement (federally, if IRS requirements are met) can work in your favor. The exception: if you're already in a higher bracket and expect lower income in retirement, a traditional 401(k) may be the better fit. Q: Are there income limits for a Roth 401(k)? No. Unlike the Roth IRA, the Roth 401(k) has no income limits. Any employee in an eligible plan can choose the Roth option regardless of salary. Q: How much can I contribute to a Roth 401(k) in 2026? Under 50: $24,500 Age 50+: $32,500 (includes catch-up) Ages 60–63: $35,750 (includes $11,250 SECURE 2.0 super catch-up) Your employer match is separate and does not count toward these limits.

How to pick a 401(k) contribution rate Your 401(k) contribution rate - also known as a deferral rate or savings rate - is a key part of a successful retirement strategy. You’ve taken that first step and have set up your Betterment 401(k) account - well done! One important piece to consider next is your contribution rate - how much from each paycheck will go into your account? With your Betterment 401(k), you could use a percentage or a fixed dollar amount, whichever you prefer. Here are a few other things to consider: Were you automatically enrolled? Many employers choose to automatically enroll their employees in the plan with a default contribution rate of 3% – if you're not sure, please check with your employer or take a look in your Retirement goal. Keep in mind, whatever the default contribution rate is, it’s just a starting point. You can (and probably should) increase that contribution rate at any time in your account. At least a decade without a paycheck Most experts recommend contributing 10%–15% of your paycheck to have enough to last you through retirement - which could be 20-30 years considering how long people are living! If you retire at age 65, with a healthy lifestyle and no major risk factors, you could live well into your 80s or 90s. That means you'll want to set yourself up for living off your personal savings and investments for about 20 years! Starting small is better than nothing If 10-15% of your paycheck sounds absurd to you right now - deep breath, think of that as something to aim for. You can start with something smaller, maybe 5 or 6%, and slowly but surely increase your savings rate every year – your birthday? Give yourself a gift and increase it by 1%. Your work anniversary? Cheers to you, bump it up again. And those 1% increases can actually be a big deal. Go for the max Because of its tax benefits, the IRS sets a limit on how much you can put into your 401(k) every year. So you could aim to contribute as much as the IRS allows! For people 50 and over, the limit is higher, which is referred to as “catch-up contributions.” And if you really want to be an over-achiever, you can also contribute to an IRA, an individual retirement account, to save even more. Tax considerations With your Betterment 401(k), you can make contributions into a traditional 401(k) account and/or a Roth 401(k). There are tax benefits to both: Traditional 401(k): Contributions are deducted from your paycheck before taxes are withheld, which can lower your taxable income. Both your contributions and investment earnings are “tax-deferred,” meaning you won’t pay taxes on what you contributed to the account as well as any earnings until you withdraw the money at retirement. In other words, save on taxes now, pay taxes later. Roth 401(k): Contributions are made with after-tax dollars so your withdrawals—both the contributions and earnings—are tax-free once you decide to retire (minimum age, 59½), and as long as you’ve held the Roth account for at least five years. In other words, pay taxes now, no taxes later. Remember that you can use both! Say you want to contribute 10% towards your retirement? You can put 5% into a traditional 401(k) and 5% into the Roth 401(k). This is one way you can balance your tax exposure. If you already have your account set up, log in today to adjust your contribution rate or reassess your traditional and Roth contributions. Haven’t started saving in your Betterment 401(k) yet? Check your email for an access link from Betterment, or get in touch: Send us an email: support@betterment.com Give us a call: (718) 400-6898, Monday through Friday, 9:00am-6:00pm ET

How an IRA can fit into your retirement strategy You already have access to a Betterment 401(k) through your employer. But if you’re not sure what the difference is between your 401(k) and IRA, we’ll lay it all out for you here. An Individual Retirement Account (IRA) is a type of investment account with tax advantages that helps you prepare for retirement. Depending on the type of IRA you invest in, you can make tax-free withdrawals when you retire, earn tax-free interest, or put off paying taxes until retirement. The sooner you start investing in an IRA, the more time you have for the earnings on your investment to compound before you reach retirement age. If you’re planning for retirement, it’s important to understand your options and learn how to maximize your tax benefits. Your employer already offers a 401(k) through Betterment—nice! But you may also want to have an IRA too, for a more robust plan. In this article, we’ll walk you through: What makes an IRA different from a 401(k) The types of IRAs How to choose between a Roth IRA and a Traditional IRA Timing your IRA contributions IRA recharacterizations Roth IRA conversions Let’s start by looking at what makes an Individual Retirement Account different from a 401(k). How is an IRA different from a 401(k)? When it comes to retirement planning, the two most common investment accounts people talk about are IRAs and 401(k)s. 401(k)s offer similar tax advantages to IRAs, but just about anyone can open an IRA. A 401(k) is what’s known as an employer-sponsored retirement plan: It’s only available through an employer. Other differences between these two types of accounts are that: Employers may offer a matching contribution into your 401(k) account, based on what you contribute 401(k) contributions come right out of your paycheck 401(k) contribution limits are significantly higher If your employer matches contributions to a 401(k), they’re basically giving you free money you wouldn’t otherwise receive. It’s typically wise to take advantage of this match before looking to an IRA. With an IRA, you determine exactly when and how to make contributions. You can put money into an IRA at any time over the course of the year, whereas a 401(k) almost always has to come from your paycheck. Note that annual IRA contributions can be made up until that year’s tax filing deadline, whereas the contribution deadline for 401(k)s is at the end of each calendar year. Every year, you’re only allowed to put a fixed amount of money into a retirement account, and the exact amount often changes year-to-year. For an IRA, the contribution limit for 2024 is $7,000 if you’re under 50, or $8,000 if you’re 50 or older. For a 401(k), the contribution limit for 2024 is $23,000 if you’re under 50, or $30,500 if you’re 50 or older. These contribution limits are separate, so it’s not uncommon for investors to have both a 401(k) and an IRA. What are the types of IRAs? The challenge for most people looking into IRAs is understanding which kind of IRA is most advantageous for them. For many, this boils down to Roth and/or Traditional. The advantages of each can shift over time as tax laws and your income level changes, so this is a common question for even advanced investors. As a side note, there are other IRA options suited for the self-employed or small business owner, such as the SEP IRA, but we won’t go into those here. As mentioned in the section above, IRA contributions are not made directly from your paycheck. That means that the money you are contributing to an IRA has already been taxed. When you contribute to a Traditional IRA, your contribution may be tax-deductible. Whether you are eligible to take a full, partial, or any deduction at all depends on if you or your spouse is covered by an employer retirement plan (i.e. a 401(k)) and your income level (more on these limitations later). Once funds are in your Traditional IRA, you will not pay any income taxes on investment earnings until you begin to withdraw from the account. This means that you benefit from “tax-deferred” growth. If you were able to deduct your contributions, you will pay income tax on the contributions as well as earnings at the time of withdrawal. If you were not eligible to take a deduction on your contributions, then you generally will only pay taxes on the earnings at the time of withdrawal. This is done on a “pro-rata” basis. Comparatively, contributions to a Roth IRA are not tax deductible. When it comes time to withdraw from your Roth IRA in retirement, your withdrawals will generally be tax free—even the interest you’ve accumulated. How to choose between a Roth IRA and a Traditional IRA For most people, choosing an IRA is a matter of deciding between a Roth IRA and a Traditional IRA. Neither option is inherently better: it depends on your income and your tax bracket now—and in retirement. Your income determines whether you can contribute to a Roth IRA, and also whether you are eligible to deduct contributions made to a Traditional IRA. However, the IRS doesn’t use your gross income; they look at your modified adjusted gross income, which can be different from taxable income. With Roth IRAs, your ability to contribute is phased out when your modified adjusted gross income (MAGI) reaches a certain level. If you’re eligible for both types of IRAs, the choice often comes down to what tax bracket you’re in now, and what tax bracket you think you’ll be in when you retire. If you think you’ll be in a lower tax bracket when you retire, postponing taxes with a Traditional IRA will likely result in you keeping more of your money. If you expect to be in a higher tax bracket when you retire, using a Roth IRA to pay taxes now may be the better choice. The best type of account for you may change over time, but making a choice now doesn’t lock you into one option forever. So as you start retirement planning, focus on where you are now and where you’d like to be then. It’s healthy to re-evaluate your position periodically, especially when you go through major financial transitions such as getting a new job, losing a job, receiving a promotion, or creating an additional revenue stream. Timing IRA contributions: Why earlier is better Regardless of which type of IRA you select, it helps to understand how the timing of your contributions impacts your investment returns. It’s your choice to either make a maximum contribution early in the year, contribute over time, or wait until the deadline. By timing your contribution to be as early as possible, you can maximize your time in the market, which could help you achieve greater returns over time. Consider the difference between making a maximum contribution on January 1 and making it on December 1 each year. Then suppose, hypothetically, that your annual growth rate is 10%. Here’s what the difference could look like between an IRA with early contributions and an IRA with late contributions: This figure represents the scenarios mentioned above.‘Deposit Early’ indicates depositing $6,000 on January 1 of each calendar year, whereas ‘Deposit Late’ indicates depositing $6,000 on December 1 of the same calendar year, both every year for a ten-year period. Calculations assume a hypothetical growth rate of 10% annually. The hypothetical growth rate is not based on, and should not be interpreted to reflect, any Betterment portfolio, or any other investment or portfolio, and is purely an arbitrary number. Further, the results are solely based on the calculations mentioned in the preceding sentences. These figures do not take into account any dividend reinvestment, taxes, market changes, or any fees charged. The illustration does not reflect the chance for loss or gain, and actual returns can vary from those above. What’s an IRA recharacterization? You might contribute to an IRA before you have started filing your taxes and may not know exactly what your Modified Adjusted Gross Income will be for that year. Therefore, you may not know whether you will be eligible to contribute to a Roth IRA, or if you will be able to deduct your contributions to a Traditional IRA. In some cases, the IRS allows you to reclassify your IRA contributions. A recharacterization changes your contributions (plus the gains or minus the losses attributed to them) from a Traditional IRA to a Roth IRA, or, from a Roth IRA to a Traditional IRA. It’s most common to recharacterize a Roth IRA to a Traditional IRA. Generally, there are no taxes associated with a recharacterization if the amount you recharacterize includes gains or excludes dollars lost. Here are three instances where a recharacterization may be right for you: If you made a Roth contribution during the year but discovered later that your income was high enough to reduce the amount you were allowed to contribute—or prohibit you from contributing at all. If you contributed to a Traditional IRA because you thought your income would be above the allowed limits for a Roth IRA contribution, but your income ended up lower than you’d expected. If you contributed to a Roth IRA, but while preparing your tax return, you realize that you’d benefit more from the immediate tax deduction a Traditional IRA contribution would potentially provide. Additionally, we have listed a few methods that can be used to correct an over-contribution to an IRA in this FAQ resource. You cannot recharacterize an amount that’s more than your allowable maximum annual contribution. You have until each year’s tax filing deadline to recharacterize—unless you file for an extension or you file an amended tax return. What’s a Roth conversion? A Roth conversion is a one-way street. It’s a potentially taxable event where funds are transferred from a Traditional IRA to a Roth IRA. There is no such thing as a Roth to Traditional conversion. It is different from a recharacterization because you are not changing the type of IRA that you contributed to for that particular year. There is no cap on the amount that’s eligible to be converted, so the sky’s the limit for those that choose to convert. We go into Roth conversions in more detail in our Help Center. So what’s right for you? Since your employer offers a 401(k) through Betterment, it’s typically best to start there. Some employers auto-enroll new hires, meaning that paycheck contributions start automatically. Whether your employer auto-enrolls or not, you’ll need to start by claiming your 401(k) account. Once you claim your account, you can set or adjust the contribution rate. Get started here: betterment.com/accountaccess. After you’ve got your 401(k) up and running, you might want to consider contributing to an IRA as well. On your dashboard, select “Add new” in the left-hand navigation, then choose: IRA. Follow the prompts to select which type of IRA you want, and sync a bank account to contribute from. You’ll have access to the same investment options available in your 401(k). Retirement can feel hard to plan for, but Betterment has plenty of investing options to make it easy to save for. We’re here to help you work towards for the retirement of your dreams.

Traditional and Roth 401(k)s Not sure what the difference is between traditional and Roth contributions for your 401(k)? We’ll explain. Ever hear the terms traditional 401(k) and Roth 401(k) thrown around and wonder – what are they? Should I be using them? Are these the keys to untold levels of wealth and financial security?! Easy does it. There are no secret weapons or silver bullets for securing a financially fit future. That said, traditional 401(k)s and Roth 401(k)s can be important tools when building your retirement strategy, so let’s make sure you know what they are. And a fun fact to know right away: you can use both. What do they have in common? A traditional 401(k) and Roth 401(k) are tax-advantaged accounts that allow you to save and invest for retirement (the tax advantages given to these types of accounts are not available in many other investing accounts). They’re available to you as a workplace benefit offered by your employer, and they’re funded with contributions from your paycheck – you set the amount, either as a dollar or a percent. The idea behind both is that they make it easier to save and invest for retirement automatically, like a built-in part of your budget. So what’s the difference? The difference is in how they are tax-advantaged. Traditional 401(k) contributions are made with pre-tax dollars, while Roth 401(k) contributions are made with after-tax dollars. Here’s an example. Let’s say you earn $40,000 a year and make contributions into a traditional 401(k). The contributions go into the account before your paycheck is taxed (“pre-tax”), lowering your taxable income. So if you save $3,000 throughout the year, you’d be paying taxes on $37,000 rather than $40,000. In addition, the money that you contribute—and any earnings—grow tax deferred until you withdraw it in retirement. At that time, your withdrawals are considered ordinary income and you’ll pay federal and possibly state taxes depending upon where you live. And, if you want to withdraw money before you turn age 59 ½, you’ll also be subject to a 10% penalty unless you qualify for an exception. If you decide to contribute to a Roth 401(k), the money is deducted from your paycheck after taxes have been taken out. So your paycheck is taxed now, reflecting your full salary of $40,000, which includes the contributions into the Roth 401(k) account. Roth 401(k) tax benefits come into play when you withdraw the money at retirement. Because you already paid taxes, you can withdraw contributions—and any earnings—tax-free if you’re age 59 ½ or older and have held your Roth 401(k) account for at least five years. Short answer: Traditional 401(k)s can lower your taxes now, but you’ll likely pay taxes when you withdraw the money at retirement. Roth 401(k)s don’t save you on taxes today, but you likely won’t have to pay taxes when you withdraw the money at retirement. Which type of account should I use? It ultimately depends on your unique financial situation and retirement goals. Betterment is not a tax advisor, and we encourage you to consult one if you want help reviewing your finances and goals. As a general rule: If you expect to be in a lower tax bracket in retirement, consider contributing pre-tax dollars into a traditional 401(k) account now, and you’ll pay taxes later. If you expect to be in a higher tax bracket in retirement, consider contributing after-tax dollars into a Roth 401(k) account, and pay your taxes now. What if I’m not sure if my tax bracket will be higher or lower in the future? You’re definitely not alone! In which case, it may make sense to invest in both. You’re allowed to make contributions to both types of accounts, spreading your tax exposure around. 5% in a traditional 401(k) and 5% in a Roth 401(k) would give you a 10% total contribution rate (in line with what many experts recommend). What if I want to withdraw my money early—that is, before I turn age 59 ½? Let’s start with the Roth 401(k). Because you already paid taxes on your contributions, you can generally withdraw that portion of the money tax-free. The portion of the withdrawal that represents your contributions to the account will generally be not taxed (and not subject to the 10% penalty). The portion of the withdrawal that represents earnings will be taxable and potentially subject to the 10% penalty. Most early withdrawals from a traditional 401(k) are taxed as ordinary income plus a 10% penalty. There are some exceptions, such as permanent disability. The tax advantages and ramifications of retirement accounts can be complicated. As Betterment is not a tax advisor, we encourage you to consult one to help you make this important decision. One more fun fact - former U.S. Senator from Delaware, William Roth, is the father of after-tax retirement accounts. Enjoy sharing that little bit of trivia at your next cocktail party, on us.