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The only difference between these two retirement vehicles is when you get taxed. A 401k allows you to contribute money pre-tax to an account (say when you are 30 years old), and the only time you get taxed is when you retire (say at 62 years old). All capital gains and dividends are tax-free for the 32 years in between.

A Roth IRA, on the other hand, allows you to contribute money post-tax to an account and this is the only time you will be taxed. All future gains are tax free which sounds pretty good.

So what’s really the difference? The rate at which you get taxed. If your tax rate in the future (at age 62 in our example) is higher than your tax rate now, a Roth IRA is comparatively advantageous.  If your tax rate when you retire is lower, then the 401k is superior.

And where does that leave you?

1. If you have no idea about your future tax rates (which most people don’t), just choose one account and stick with it. Unless you are expecting to move tax brackets significantly, it won’t matter in the end.
2. If you are a little bit more informed and know your tax bracket will wildly shift (say you are in an enormously high tax bracket now and think you are going to be a teacher when you retire, or vice versa)  then choose the 401k or Roth, respectively.
3. If you are clueless, but are a little bit more sophisticated when it comes to investing, you can always get both a 401k AND a Roth IRA. That way you are protected against shifts both ways in the tax code and your tax bracket.