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Can you explain the difference between a Roth 401k and a Roth IRA and what someone should consider when deciding between the two as a primary retirement tool?

I'm in my mid-30s with a fair amount of investable assets that I want to direct towards retirement.

May 23, 2013 by Jenna from Boston, MA in  |  Flag
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4 votes

Jenna, The differences can be summed up as 1) Access and 2) Dollars. To access a Roth 401k your employer has to have that option in your retirement plan. You can elect that option and your salary deferrals will be taken after taxes and posted to that type of account. You can split your 401k contributions between Roth and pre-tax if you want but in total you are restricted to the maximum amount you would have been subject to anyway. To access a Roth IRA you have to have AGI below a certain level. The amount you can contribute is 5 or 6 thousand dollars depending on your age and earned income. Choosing between the two types of accounts depends on which one you have access to and how much money you want to put away. Best of luck.

Comment   |  Flag   |  May 23, 2013 from Kingsport, TN

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4 votes

The main difference between the two is how much can be contributed to each. That maximum you can contribute to a Roth 401K is $17,500 the maximum you can contribute to a Roth IRA is $5500. The other advantage to a Roth 401k is that your employer can match if that is that is the company's policy.

Comment   |  Flag   |  May 23, 2013 from Calabasas Highlands, CA

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Hi Jenna from Boston, You have some great answers here. Sometimes I'm torn to answer questions because it truly is what I refer to as sound bite financial planning. If you have the opportunity to sit down with an advisor who can look over your current situation, income, spending, savings - then outline the goals you have for yourself both in the short and long term, I would highly suggest you do so. Every situation is different - financial products are just that, products. You need to have a strategy that will keep you moving in a positive direction with an eye on how you can access the money between now and the time you reach your pinnacle of retirement where you want your money to produce an income for you. In order to do so, there is alot more to the answer based on what you want to have happen. Learning the strategy of using financial products and maintaining the ability to change with economic conditions is a must. I would suggest you find a financial advocate to work with who listens to you and helps you achieve what it is you are wanting to accomplish.

Comment   |  Flag   |  May 23, 2013 from Grand Blanc Township, MI

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Jenna, Although there is lots of good information above, I particularly like Gina's commentary, as any comments you receive are based on generalizations and are far more effective when your unique situation is thoroughly understood. An answer that might be appropriate for one individual may not be optimal for someone else. A financial adviser could help in this process. It is important to build well-though-out, comprehensive strategies, not based on sound bites, that can have a strong positive impact on your financial future. As we consider generalizations: Any matching in your 401(k) is an important factor as we almost never want to leave "free money" on the table. In addition, a Roth IRA (if you are eligible) can provide many more investment options than the available alternatives in a 401(k).

Comment   |  Flag   |  May 23, 2013 from Warwick, RI

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Jenna, There is a lot of good information here. I would only add that if your income is below the Roth IRA threshold of $178,000 for marrieds and $127,000 for singles you can contribute to both the 401k Roth and the Roth IRA. Aside from the differing limits and contribution amounts they both provide the same future tax benefit.

Comment   |  Flag   |  May 23, 2013 from Marlton, NJ

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John P. Duncan Level 18

Roth 401k is at work and a Roth IRA is an individual plan. Both plans have maximum annual contributions so the real question is how much investable assets are you looking to invest for retirement. Both will provide tax free growth and withdrawal in retirement. If you are in good health and want to put larger sums away, then a properly structured life insurance plan would create lifetime tax free income as well.

1 Comment   |  Flag   |  May 23, 2013 from Mesa, AZ
Evan M. Levine, ChFC

I have found Life Insurance to be a complicated way to create " lifetime tax free - income" . As you withdraw beyond basis you need to use loans which can be problematic. I believe Life insurance works best when it's views as protection not savings.

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Flag |  May 23, 2013 near Port Washington, NY

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Jenna, don't listen to these guys. NOT, just kidding. This is all good info for you. With Gina's comments as a base platform. Thank you for looking into a Roth of any kind. Too many have not seriously considered the long term advantages of paying the tax now instead of later. Do you think taxes will go up in the future or down? Unless you plan on making a lot less money in retirement than you do now, you will not necessarily be in a lower tax bracket when you retire. The generation older than you was constantly told to pile as much in their tax deferred plans as possible. Now, many of them are retiring with this huge basket of fully taxable money and they are not liking it. That's the deal they cut though. So, look at both options as a deal that you are making with certain rules. Which set of rules do you like the best?

As you've seen above, annual contribution limits are one of the biggest considerations. Also, investment choices are a big consideration. Inside the company plan, you may be limited or you may not. We know that outside the company plan, you are not limited in your investment choices. You also heard "accessibility" mentioned above. They are talking about all of the rules associated with a company plan. Getting that company match though, wow, if you have it, that could be great. So, this is why you see us urge you to speak with a planner to help company the pros and cons in relation to your other details. Thanks for asking.

Comment   |  Flag   |  May 23, 2013 from Franklin, TN

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Specific counsel would require more information and is beyond the scope of this platform. However - In the end- I would say that the Roth / Traditional Split does not matter all that much; What's most important is the % of your income that you invest - and your asset allocation decision.

Comment   |  Flag   |  May 23, 2013 from Port Washington, NY

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Jenna, the most you can put in an individual Roth is $5500 per year. On an individual Roth, there is an income limit of $112,000 for individuals and $178,000 for couples filing jointly. You could have greater investment options with lower, or at least more controllable fees. Direct contributions into a Roth can be withdrawn tax-free at any time, though rollover contributions need a 5 yr wait.

On a Roth 401(k), the limit on contributions is $17,500. Though there is no income limitation, if your plan does not have 'safe harbor' you could be subject to what is called a corrective distribution. Check with your plan administrator, not HR to be sure you don't get caught up in that. HR may tell you that you can contribute up to $17,500, but the plan administrator will test the plan and send you a check if it fails the test. Distribution is subject to traditional 401(k) rules, meaning there is a penalty for withdrawal before age 59 1/2, 55 if you separate from your employer. Your plan may permit loans, which would not be an option on an individual plan.

Hope this helps.

Comment   |  Flag   |  May 23, 2013 from Delray Beach, FL

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