Dear Liz: Can you explain the difference between a Roth IRA and a Roth 401(k)? What are the benefits of a Roth 401(k)? My company offers it and I am considering beginning to make deferral contributions there while continuing my 401(k) contributions.
Answer: Contributions to Roth IRAs and Roth 401(k)s are after tax, which means you don’t get an upfront tax deduction as you do with traditional IRA and 401(k) accounts. But the money grows tax deferred and can be tax free in retirement.
You typically open and contribute to a Roth IRA at a brokerage, which gives you access to a wide range of investment options. Just like traditional 401(k) accounts, Roth 401(k)s are offered by an employer, usually with a limited number of investment choices.
Roth 401(k)s allow people to contribute significantly more than they could to Roth or traditional IRAs. Roth 401(k)s also allow contributions by higher earners, who might be shut out of contributing to a Roth IRA.
Roth IRA contributions are limited to $6,000 with a $1,000 catch-up contribution for people ages 50 and older. Your ability to contribute begins to phase out at certain income limits. This year, the phaseouts start at $125,000 of modified adjusted gross income for single filers and $198,000 for married couples filing jointly.
Roth 401(k)s don’t have income limits and allow you to contribute as much as $19,500 ($26,000 for those age 50 and older). That is the combined limit for elective deferrals from your paycheck. If you’re under 50 and contributing $10,000 to the pretax portion of the 401(k), for example, you could contribute a maximum of $9,500 to the Roth option.
Roth IRAs and Roth 401(k)s also have different rules for withdrawals. You can remove your contributions from a Roth IRA at any time without paying taxes or penalties. Withdrawals from a Roth 401(k) before age 59½ also can incur taxes and penalties, although you usually do have the option to take loans.
Also, you’re not required to start taking withdrawals at age 72 from a Roth IRA, as you typically are with other retirement accounts, including Roth 401(k)s. You will have the option of rolling a Roth 401(k) into a Roth IRA, typically after you leave your job, so you can avoid minimum required distributions that way.
Hi Liz,
You listed some key differences between Roth IRAs and Roth 401k accounts.
What about exposure in the case of bankruptcy, divorce, or other legal settlements? Are there differences between a Roth IRA and a Roth 401k in those respects?
I am age 68. I am retired after 20 yrs in the military, and 23 yrs with a large retail company. I decided to quit work at that company about four years ago, with no plans to return to work in the future. I have chosen to delay applying for Social security, but I did sign up for Medicare and began making those quarterly payments. This means that as-of-this-date, I have “contributed” over $5,000 I have read many articles (yours are the best) about people wanting to get the most from Social sec and the concepts of break-even dates… etc , however, I never see information about paying for Medicare, while delaying Soc sec and the resulting “monetary setback”. Am I the only person who has chosen to do this?