Roth 401(k) vs. Roth IRA: What’s the Difference?
September 11, 2020
By Rahul Iyer
Whether you choose to contribute to a Roth 401(k) or a Roth IRA, is based on a number of factors. The decision must take into consideration your income, age as well as when you intend to take funds from your retirement savings account. As you make your decision, you should also know that there are pros and cons of each retirement plan.
What is a Roth 401(k)?
A Roth 401(k) is an employer-sponsored retirement savings account. Unlike an ordinary 401(k), contributions to this plan are made with after-tax dollars. This type of retirement plan is ideal for individuals who are likely to be in a higher tax bracket when they retire because the distributions are tax-free.
What is a Roth IRA?
This is an individual retirement account that permits contributors to withdraw funds within pre-established terms. Roth IRAs are not much different from standard IRAs. The difference between the two is how they are taxed. The contributions to a Roth IRA are made from after-tax funds. However, your future qualified withdrawals will be tax-free.
Why Contribute to a Roth 401(k)
There are many advantages to contributing to a Roth 401(k). Subscribing to a Roth 401(k) is possible for individuals at any level of income because it does not have an income limit. Roth 401(k)s also allow employers to match the contributions of their employees. As a matter of fact, employees are even given tax incentives to match contributions. Another reason to contribute to a Roth 401(k) is that you will be permitted to take a loan against your balance. The cap for this loan is the lower of 50% of your balance or $50,000.
Why Contribute to a Roth IRA
Roth IRAs also feature many benefits that make it a wise option. Those who contribute to a Roth IRA will not face mandatory required minimum distributions (RMDs). This gives Roth IRA account holders the opportunity to let their money grow as long as they desire. You can even decide to leave your Roth IRA balance to your children or spouse. Roth IRAs also give contributors access to a wide range of investment vehicles. An excellent benefit of choosing a Roth IRA is that you won’t be faced with penalties or taxes when you withdraw at any point.
Each of these plans has its own unique features and benefits. Whichever you choose to use will be determined on the factors mentioned earlier; nevertheless, both are incredible retirement plans. Those who are most likely to choose a Roth 401(k) plan are high income earners while individuals who prefer a retirement plan that is flexible and void of required minimum distributions may prefer a Roth IRA.