What’s the Difference Between Roth IRA and Roth 401(k)?

November 3rd, 2021 by
What's the Difference Between Roth IRA and Roth 401(k)

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Roth IRA and Roth 401(k) sound like they are very similar types of retirement accounts, but the names of the accounts are all that are similar. 

Here are some main areas that make up their differences, according to Bank Rate.

In both types of accounts, contributions are made after-tax. The advantage of this is that when you reach the age of 59 ½ you can withdraw from the account tax-free since you had already paid tax as you were depositing the money.

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How do you decide whether you should have a Roth IRA or a Roth 401(k)?  Here are six areas that you should consider.

The most obvious difference between the two accounts is the contribution limits each account has. In 2021, an employee can save up to $19,500 per year and if you are over the age of 50, the contribution can be up to $26,000.

With an IRA your contributions are limited to $6,000 a year with workers who are 50 years or older who can contribute up to $7,000 a year.

When it comes to distributions of the accounts in a Roth IRA, there is no requirement as to when you need to start taking distributions while the account holder is alive. 

If the account holder passes away, a spouse who inherits the Roth IRA will not have to make withdrawals or pay taxes on the amount. 

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Anyone else who is a beneficiary will have to make the minimum withdrawal amount each year. 

The Roth 401(k) does have a required minimum distribution amount starting at when you reach the age of 72; however, to get around this you can roll the account into a Roth IRA and therefore will not need to make that minimum yearly withdrawal.

Having a Roth 401(k) has the advantage that your contributions can be matched by your employer up to a certain percentage. 

It’s basically free money from your employer on top of what you are putting into the account. 

If you choose this benefit your employer’s contribution will be placed into a traditional 401(k) rather than into the Roth 401(k) account.

If you divide your contributions between a regular 401(k) and a Roth 401(k), your employer’s contribution will go into the traditional account as well. An employer’s contribution cannot be done on an after-tax basis and that is why there needs to be a separate account.

With a Roth IRA account, there are income limitations. As an example in 2021, if your modified adjusted gross income was $208,000 or more for a married couple filing jointly or $140,000 or more for a single filer, the accounts are off-limits. As for a Roth 401(k) account, there are no income limits.

There are certain rules for early withdrawals as well. You can withdraw from both types of Roth accounts tax-free if there is certain criteria met including:

  • The account holder reached 59 ½, or distributions are moved in the event of a disability or death
  • The accounts must be held for at least five years

If you take a withdrawal from your Roth 401(k) you may have to pay a 10% penalty tax on any earnings taken out, but not on your contribution amounts. If you would like to access your 401(k) funds without paying the tax you may be able to take out a loan, if the plan permits that.

You can always take out funds that you contributed from your Roth IRA account without tax penalties if you meet the above criteria. You may also withdraw up to $10,000 to buy, build, or rebuild a first home without paying taxes and the 10% early withdrawal penalty even if you are under 59 ½. You can also take out the money to cover certain educational expenses as well, again avoiding the tax and early withdrawal penalties.

When it comes to considering which account is best for you, consider the differences between the two accounts, along with your current and future financial matters as well as your specific financial goals. 


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