Roth 401(k) vs. Roth IRA: An Overview

Both Roth 401(k)s and Roth individual retirement accounts (Roth IRAs) offer you the ab🅷ility to save and generate tax-free wealth in retirement. Roth 401(k)s and Roth IRAs share similarities, such as tax-free earnings growth and tax-free withdrawals in retirement.

However, Roth 401(k)s offer employer matching an🐭d have higher contribution limits versus Roth IRAs. On the other hand, you have more investment options with a Roth IR🐠A, while Roth 401(k)s only allow you to invest in the funds offered by the plan sponsor.

Whether a Roth 401(k) or a 澳洲幸运5官方开奖结果体彩网:Roth individual retirement account (IRA) best fits your needs depends on your financial goals, i📖ncome, age, and when you want to start with💞drawing your nest egg.

While both have advantages and disadvantages, discover the key differences between a Roth 401(k) and a Roth ⛦IRA and how these accounts can help you save for retirement.

Roth 401(k)

Created by the 澳洲幸运5官方开奖结果体彩网:E🧸conomic Growth and Tax Relief Reconciliation Act of 2001, 澳洲幸运5官方开奖结果体彩网:Roth 401(k)s are a hybrid, blending many of the best parts of traditional 401(k)s and Roth IRAs to give employees a unique option when planning for retirement.

Like traditional 401(k)s, contributions are made directly from an employee’s paychecks, and the employer may 澳洲幸运5官方开奖结果体彩网:match part of those contributions. Unlike traditional 401(k) plans, you pay income taxes on the money before depositing it into the account, meaning you receive no upfront tax benefit in the year of the contribution. In return, you will not pay income taxes on Roth 401(k) withdrawals in retirement.

Roth IRA

Like a Roth 401(k), you fund Roth IRAs with after-tax dollars, making qualified distributions tax-free. Roth IRAs offer more 澳洲幸运5官方开奖结果体彩网:investment options than Roth 401(k)s.

However, a Roth IRA is not sponsored by your employer, and you will not receive an employer match, but you can continue investing in the same Roth IRA, even after you change jobs. Individuals can select the financial institution or broker to hold their Roth IRA and investments. You also determine how much you want to contribute each year.

澳洲幸运5官方开奖结果体彩网:Roth IRAs were established by the 澳洲幸运5官方开奖结果体彩网:Taxpayer Relief Act of 1997 and named for U.S. Sen. William Roth of Delaware.

Key Differences

Both the Roth 401(k) plans and the Roth IRA plans use after-tax dollars, meaning that the owner does not have to pay income taxes when they receive distributions, making this advantageous to those who expect to earn more money later in life. However, several key distinctions exist between a Roth IRA and a Roth 401(k) plan, as shown below.

Income Limits

Roth IRAs come with an 澳洲幸运5官方开奖结果体彩网:income limit. Per the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS), individual taxpayers with an 澳洲幸运5官方开奖结果体彩网:adjusted gross income (AGI) of over $161,000 in 2024 or married couples filing jointly who made over $240,000 in 2024 are not eligible for Roth IRA contributions.

The absence of an income limit gives a Roth 401(k) a significant advantage over a Roth IRA. In other words, even those with high incomes can still contribute, which pairs well with the Roth 401(k)’s higher contribution limits.

Required Min💯imum Distributions (RMDs) for ꦓTraditional 401(k)s and IRAs

If you hold a traditional 401(k) or IRA, you must take 澳洲幸运5官方开奖结果体彩网:required minimum distributions🅘 (RMDs) by a certain age. As of Jan. 1, 2023, the passage of the 澳洲幸运5官方开奖结果体彩网:SECURE 2.0 Act increased the age to begin RMDs on other retirement accounts from 72 to 73 for individuals born between 1951 and 1959 and age 75 for those born in 1960 or later.

Failure to meet your RMD during the year may subject you to a financial penalty of 25% of the shortfall. However, if you correct the mistake promptly, the penalty drops to 10%.

The only circumstance to defer taking RMDs is if you are still employed and not a 5% owner of the company sponsoring the plan.

Required Minimum Distributions (RMDs) for 💎Roth 401(k)s ♌and IRAs

With a Roth 401(k), you no longer have to take required minimum distributions (RMDs) after 2023. So, RMDs in designated Roth accounts in a 401(k) are no longer required. As of Jan. 1, 2023, the passage of the 澳洲幸运5官方开奖结果体彩网:SECURE 2.0 Act increased the age to begin RMDs on other retirement accounts from 72 to age 73 for individuals born between 1951 and 1959 and age 75 for those born in 1960 or later.

A Roth IRA does not require you to take RMDs—ever. The flexibility gives you the option to keep contributing to your account and letting those funds grow indefinitely. You can also pass your Roth IRA to your spouse or descendants.

For taxable years beginning after Dec. 31, 2023, the SECURE 2.0 Act also eliminates the pre-death RMD for the owner of a 澳洲幸运5官方开奖结果体彩网:Roth-designated account in an employe꧅r 401(k) 🌳or other retirement plans.

Under current law, required minimum distributions are not required to begin before the death of the owner of a Roth IRA, although pre-death distributions are required in the case of the owner of a Roth-designated account in an employer retirement plan.

Investment Options

With a Roth 401(k), your investment options are limited to those offered by the plan administrator, commonly various types of 澳洲幸运5官方开奖结果体彩网:mutual funds with set 澳洲幸运5官方开奖结果体彩网:expense ratios.

A Roth IRA has a much wider range of 澳洲幸运5官方开奖结果体彩网:investment options. Also, you can shop aroundᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚ to see which custodians and vehicles carry the smallest transaction and administrative expenses.

Contributions and Contribution Limits

The biggest advantage to Roth 401(k)s is the possibility of matching contributions from an employer. Employers are offered a tax incentive to make them. Employees who participate in the plans can contribute an annual maximum of $23,500 for 2025.

Individuals can contribute an additional $7,500 澳洲幸运5官方开奖结果体彩网:catch-up contribution in 2025 if they turn 50 years old by the end of the year. Please note, IRA catch-up contributions will be adjusted for inflation and subject to cost of living adjustments or COLAs.

There is a hitch, though. Employers may match your contribution with 澳洲幸运5官方开奖结果体彩网:pretax dollars, and when the Roth is funded with post-tax dollars, the matching funds and their earnings will be placed in a regular 401(k) account. That means you may pay taxes on this money—and on its earnings—once you start taking distributions.

Roth IRAs have a much 澳洲幸运5官方开奖结果体彩网:lower contribution limit ($7,000 for 2025) compared to a Roth 401(k). In addition, Roth IRAs are self-funded and do not allow for matching employer contributions.

Beginning in 2025, employers will be required to automatically enroll eligible employees in new 401(k) plans with a participation amount of at least 3% but no more than 10%. The contribution escalates at the rate of 1% per year up to a minimum of 10% and a maximum of 15%.

Withdrawals

Access to the funds in your Roth 401(k) before age 59½ is limited. Tapping nest eggs before retirement should always be a matter of last resort, but if you must do it, you can’t take cash out of your Roth 401(k) without incurring a 10% penalty.

With a Roth IRA, you can withdraw an amount equivalent to the contributions you have made at any time without penalties or taxes. However, this does not apply to a Roth IRA’s earnings, for which preretirement withdrawals if you’re under age 59½ still come with a 10% penalty.

However, under certain circumstances, such as buying a home for the first time or incurring childbirth costs, you are allowed withdrawals of earnings from your Roth IRA free of penalty if you’ve held the account for less than five years, and free of penalty and taxes if you have held it for more than five years.

With the passage of the SECURE 2.0 Act, participants can access up to $1,000 annually from retirement savings for emergency personal or family expenses without paying the 10% early withdrawal penalties.

Additionally, employees will be able to set up a Roth emergency savings account with up to $2,500 per participant. Survivors of domestic abuse can withdraw the lesser of $10,000 or 50% of their retirement account without penalty and victims of a federally declared disaster can withdraw up to $22,000 from their retirement account without penalty.

Loans

An advantage of a Roth 401(k) account is the ability to borrow money against your account balance. You can borrow ᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚup to 50% of your account balance or $50,000, w𓃲hichever is smaller.

However, if you fail to pay back the loan as per the terms of the agreement, that money could be considered a taxable distribution.

Unlike Roth 401(k)s, Roth IRAs don’t allow loans but do permit a Roth IRA rollover. During this period, you have 60 days to move your money from one account to another. As long as you return that money to it or another Roth IRA in that time frame, you are effectively getting a 0% interest loan for 60 days.

The Bottom Line

Roth IRAs and Roth 401(k)s come with their own perks and benefits. Neither type of Roth account is inherently better than the other. Many investors 🍸may choose to incorporate both into their retirement plans to capitalize on the benefits.