ELI5: What is the difference between a Roth IRA and a 401k

A Roth IRA and a 401k are both special piggy banks for your future self, but one you pay taxes on before putting money in, and the other you pay taxes on when you take the money out later.

Imagine you're buying candy. With a Roth IRA, it's like buying candy after you've already paid the sales tax. So the candy is a little cheaper now, because you've paid the tax. Later, when you want to eat that candy (retirement!), it's all yours, tax-free!

With a 401k, it's like buying candy before you pay the sales tax. The candy seems a little more expensive now, because the tax is not included. But when you finally want to eat the candy later (retirement!), that's when you'll pay the sales tax.

Here's a simpler breakdown:

• Roth IRA:

Which one is better? It depends! If you think you'll be in a higher tax bracket when you retire (making more money and paying more taxes), a Roth IRA might be better. If you think you'll be in a lower tax bracket when you retire, a 401k might be better. Also, free money from your employer with a 401k is hard to pass up!