Liz Weston: What are the differences between a Roth IRA and a Roth 401 (k)?
Dear Liz: Can you explain the difference between a Roth IRA and a Roth 401 (k)? What are the advantages of a Roth 401 (k)? My company offers it and I am considering starting to make deferred contributions to it while continuing my 401 (k) contributions.
Answer: Contributions to Roth IRA and Roth 401 (k) are after tax, which means you don’t get an initial tax deduction like you do with traditional IRA and 401 (k) accounts. But the money grows tax-deferred and may be tax exempt in retirement.
You typically open and contribute to a Roth IRA at a brokerage firm, which gives you access to a wide range of investment options. Much like traditional 401 (k) accounts, Roth 401 (k) are offered by an employer, usually with a limited number of investment choices.
Roth 401 (k) allow people to contribute much more than they could to Roth or traditional IRAs. The Roth 401 (k) also allow contributions from high income earners, which might be excluded from contributing to a Roth IRA.
Roth IRA contributions are limited to $ 6,000 with a catch-up contribution of $ 1,000 for those 50 and over. Your ability to contribute begins to decline after certain income limits. This year the phase-outs start at $ 125,000 of adjusted adjusted gross income for single filers and $ 198,000 for married couples filing jointly.
Roth 401 (k) have no income limit and allow you to contribute up to $ 19,500 ($ 26,000 for those 50 and over). This is the combined limit for elective deferrals from your paycheck. If you are under 50 and contribute $ 10,000 to the pre-tax portion of 401 (k), for example, you could contribute up to $ 9,500 to the Roth option.
The Roth IRAs and Roth 401 (k) also have different rules for withdrawals. You can withdraw your contributions from a Roth IRA at any time without paying taxes or penalties. Withdrawals from a Roth 401 (k) before the age of 59 and a half can also result in taxes and penalties, although you usually have the option of taking out loans.
Plus, you don’t have to start making withdrawals at age 72 on a Roth IRA, as you typically do with other retirement accounts, including Roth 401 (k) s. You will have the option of converting a Roth 401 (k) into a Roth IRA, usually after you quit your job, to avoid the minimum distributions required this way.
Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions can be sent to him at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.