Roth IRA or Roth 401k?

by | Apr 8, 2015 | Podcasts, Retirement Planning

Here at Mullooly Asset Management, we help a lot of individuals manage their retirement accounts at work. In doing so, we’ve taken a look at countless 401k’s, 457’s and 403b’s. Within many of these employer sponsored plans, a Roth option is offered. I’ve noticed some confusion between these Roth 401k’s (or Roth 403b’s…or Roth 457’s) and Roth IRA’s. During this week’s podcast, Tim and I break down the main differences between Roth IRA’s and Roth options offered through employer sponsored retirement plans.

Roth 401k’s, 403b’s, and 457’s are technically referred to as designated Roth accounts. If you think about them this way, it helps to clarify what they actually are: a designated account that you may elect to fund with after-tax contributions within your employer’s plan. In contrast, a Roth IRA is an individual retirement account that you set up separately from any employer you might have.

Roth IRA’s and designated Roth accounts have similarities and differences. Your personal situation will dictate which account is most advantageous for your goals. Learning how these accounts differ is an important step towards making an educated decision. We’re here to provide some of the basics. I’ll also link to a helpful resource at the bottom of this post.

Both Roth IRA’s and Roth 401k’s are funded with after-tax dollars. If your employer offers a Roth option within your plan, you can elect to have your contributions made into the Roth account. Usually contributions into a 401k, 403b, or 457 are made pre-tax. The money you contribute to a Roth account will grow tax-free and remain tax-free when you take it out, as long as it’s taken through a qualified distribution.

Roth IRA contribution eligibility is determined by your income. Some individuals may make too much money to contribute to a Roth IRA. However, designated Roth accounts within employer sponsored plans have no income-based restrictions.

For 2015, Roth IRA contributions are capped at $5500. If you’re over the age of 50, you can contribute a catch-up provision of an additional $1000. Designated Roth accounts within employer sponsored plans allow up to $18000 to be contributed in 2015. The special catch-up provision for those over age 50 is an additional $6000. Something people should make note of is that designated Roth contributions and pre-tax 401k contributions both fall under the same $18000 limit. You cannot contribute $18000 to your pre-tax 401k and another $18000 to a Roth 401k. However, you can contribute a combined $18000 to a 401k or Roth 401k and an additional $5500 to a Roth IRA, if you don’t make too much money.

Roth IRA’s have no required minimum distributions (RMD’s) in retirement. Required minimum distributions are a factor for those who invest through a designated Roth account. After age 70 1/2 the RMD’s will go into effect.

When you contribute to a Roth IRA, you can always withdraw your original contributions without penalty. Designated Roth accounts inside of employer sponsored plans do not provide this benefit to investors. You cannot withdraw your contributions without penalty when it comes to Roth 401k’s. You may be able to take a loan from your retirement account, but that will depend on your individual plan and its rules.

Like I said before, these are just some basic similarities and differences between Roth IRA’s and Roth 401k’s. Depending on your personal situation a Roth IRA, Roth 401k, both or neither could be the right account for you to invest in. We highly recommend that you consult with a fee-only investment advisor to discuss which type of account is right for you.


Join our Newsletter


Future-Proof Your Finances

Download the 25-Year Success Strategy

Enter your email & get this free PDF download to help you prepare for the next 25 years.  We will send periodic updates as well. Unsubscribe at any time.

You have Successfully Subscribed!

Share This