Employee Deferral vs. Roth IRA Deferral: Which Is Better?

It's more than just contribution dollars

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Employee deferrals are income contributions to an employer-sponsored plan and excluded from an employee’s gross income. Roth individual retirement accounts (IRAs) are individually owned and managed retirement plans. Contributions aren’t salary deferrals, but are made directly by the individual to the Roth IRA account.

If your employer offers a retirement plan, you may also be able to open and fund a Roth IRA. Learn what the differences are and what they mean to your retirement savings.

What’s the Difference Between Employee Deferrals and Roth IRA Contributions?

Employee Deferrals Roth IRA
Plan Type Employer sponsored Individually owned
Eligibility Determined by plan Individuals with earned income up to income limits
Contribution Limits $20,500 $6,000
Investments Menu selected by employer Wide array of options
Loans Available Prohibited
Required Minimum Distributions (RMDs) Yes No

Plan Type

Employee deferrals are part of employer-sponsored defined contribution plans such as a 401(k), 457, employee stock ownership, or 403(b) plan. An employee voluntarily defers a portion of their pay, which the employer then contributes to the plan on the employee’s behalf. The employee can exclude elective contributions from gross income. Contributions to the account and earnings in the account aren’t taxed until distribution in retirement. Generally, penalties apply if any distributions are taken before age 59 1/2.

A Roth IRA is an individual retirement account. The account is individually owned and managed, and held by a custodian such as a bank or brokerage house. Your contributions aren’t deductible, but earnings grow tax-free, and qualified distributions of earnings are also tax-free. Contributions to Roth IRA can be withdrawn anytime without taxes or penalties.


A Roth 401(k) is a hybrid retirement account: a Roth vehicle inside an employer-sponsored plan. Employee contributions to the Roth 401(k) are made with after-tax dollars.


Employer-sponsored plans can offer plans to different groups of employees as long as the plans comply with the Employee Retirement Income Security Act of 1974 (ERISA). For example, you may only qualify for your employer’s retirement plan if you work more than 20 hours per week, or if you’ve worked for the employer for a certain amount of time.

The ability to fund a Roth IRA is determined by whether you’ve earned compensation for the year of some kind from an acceptable income source (wages, salary, tips, self-employment earnings), and income levels. For example, if your modified adjusted gross income (MAGI) as a single filer is higher than $129,000 for the 2022 tax year, you may not be able to contribute to a Roth.

Contribution Limits

In 2022, the most you can contribute to all IRAs, including a Roth, is $6,000. If you are over age 50, the limit is $7,000. The maximum you can contribute is reduced if your income is above a certain threshold.

Defined contribution-plan participants can contribute up to the lesser of $20,500 or their total compensation in 2022. Participants over age 50 may be able to make “catch-up contributions,” or an additional $6,500 in specific plans.


Employer-sponsored plans offer a menu of investments. The most common option is a choice of mutual funds, but may also include exchange-traded funds (ETF), and may include employer stock. The plan sponsor (generally, the employer) is legally responsible for vetting the investment choices offered.

Roth IRAs are very flexible and often allow the individual to choose investments from an array of options, including mutual funds, ETFs, CDs, and individual stocks.


Roth IRA funds can’t be invested in life insurance and collectibles.


Employer-sponsored plans can offer loans, but the employer isn’t required to do so. Loans are not available from any IRA—Roth or traditional.

Required Minimum Distributions

Defined contribution plans are subject to the IRS required minimum distributions (RMD). Beginning at age 72, you’ll have to withdraw at least a minimum amount based on your life expectancy. There are no RMDs for Roth IRAs.

Which Is Right for You?

You can contribute far more to an employer-sponsored plan than a Roth IRA, no matter your income level. Employers may match some or all of employee contributions to the plan. For most people, employee deferrals are a more effective way to save for retirement.

The Roth IRA offers investment flexibility. Defined contribution plans usually have a limited menu of investment choices, while Roth IRAs can invest in anything other than life insurance and collectibles.

A Best-of-Both Worlds Option

Participating in a defined contribution plan doesn’t prevent you from contributing to a Roth IRA, as long as your income is within the required limits. If you’ve “maxed out” your contributions to your employer-sponsored plan, you may be able to supplement your retirement savings with a Roth IRA.

The Bottom Line

Employee deferrals are part of an employer-sponsored defined contribution plan and not included in your income. For most people, participating in their employer’s plan is a more efficient way to save for retirement than a Roth IRA, particularly if the employer matches contributions.

Frequently Asked Questions (FAQs)

What is the employee deferral limit?

Employee deferrals under a defined contribution plan are limited by section 415 of the Internal Revenue Code (IRC), and adjusted each year for the cost of living. In 2022, the limit is $20,500 for employees under 50, and $27,000 for employees age 50 and older.

How do you open a Roth IRA?

Opening a Roth IRA is simple. All you need to do is choose a custodian (usually a bank, brokerage firm, or other financial institution). You’ll complete a form to open the account. Decide how much you want to contribute, and how you want to invest the money.

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  1. IRS. “Retirement Topics - Exceptions to Tax on Early Distributions.”

  2. IRS. "Publication 590-B (2020), Distributions From Individual Retirement Arrangements (IRAs).”

  3. U.S. Department of Labor. "FAQs about Retirement Plans and ERISA."

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  6. IRS. "Retirement Topics - Catch-Up Contributions."

  7. IRS. “IRA FAQs.”

  8. IRS. "Retirement Plans FAQs Regarding Loans."

  9. IRS. "Roth Comparison Chart."

  10. IRS. "2022 Limitations Adjusted as Provided in Section 415(d), etc."

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