5 Key Differences Between a Roth IRA & Roth 401(k)
When saving for retirement, you have many different account types from which to choose from. Growing in popularity is the Roth account. Roth accounts can come in two forms – an IRA and a 401(k). In this comprehensive guide, we’ll review some stark differences between Roth IRA and Roth 401(k) accounts, helping you navigate your retirement savings journey effectively.
What is a Roth Account?
Before we dive into the specifics, let’s briefly recap what Roth accounts are all about. Roth accounts, whether IRA or 401(k), are retirement savings vehicles that offer tax-free growth and withdrawals in retirement, assuming certain requirements are met. Unlike traditional retirement accounts, contributions to Roth accounts are made with after-tax dollars, meaning you don’t get an immediate tax deduction. However, the trade-off is that qualified withdrawals in retirement are tax-free, providing a significant advantage for those in higher tax brackets during retirement.
Roth IRA vs. Roth 401(k): Understanding the Differences
1. Eligibility and Accessibility:
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- Roth IRA: Available to anyone with earned income, subject to income limits. Contribution limits for 2024 are $7,000 ($8,000 if you’re 50 or older).
- TIP: If your income is above the allowable limit, there may still be other ways to fund a Roth IRA.
- Roth 401(k): Offered through employers who choose to provide this option in their retirement plans. There are NO income limits for participation, and contribution limits are much higher compared to Roth IRAs, capped at $23,000 for 2024 ($30,500 if you’re 50 or older).
- Roth IRA: Available to anyone with earned income, subject to income limits. Contribution limits for 2024 are $7,000 ($8,000 if you’re 50 or older).
Download this helpful guide featuring income limits, contribution limits, personal tax rates and more: Important Numbers 2024
2. Employer Match:
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- Roth IRA: There are no matching contributions since this is considered a personal retirement account. You are responsible for 100% of your contributions.
- Roth 401(k): Employers may choose to match contributions, which can significantly boost your retirement savings. Starting in 2024, employers can now make matching contributions to the employees Roth account (which has not been allowed up until now). There are tax consequences of receiving your match as a Roth contribution, but the benefits may outweigh the tax cost.
3. Investment Options:
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- Roth IRA: Offers a wider range of investment options, including stocks, bonds, mutual funds, ETFs, and more.While the expanded list of investment options may be overwhelming, it does allow for a more customized investment strategy. Investors also have the flexibility to choose their preferred brokerage firm. Common online brokerage firms include Charles Schwab, Fidelity and E-trade.
- TIP: Making a contribution is only the first step. You will then need to manually invest each contribution. Otherwise, your money will just be sitting in cash, providing little-to-no growth.
- Roth IRA: Offers a wider range of investment options, including stocks, bonds, mutual funds, ETFs, and more.While the expanded list of investment options may be overwhelming, it does allow for a more customized investment strategy. Investors also have the flexibility to choose their preferred brokerage firm. Common online brokerage firms include Charles Schwab, Fidelity and E-trade.
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- Roth 401(k): Investment options are limited to those offered within the employer’s plan. While some plans provide a diverse selection, others may have more restricted choices. Once you make investment selections within your plan, your contributions will be automatically invested with each deposit
4. Rollover and Portability:
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- Roth IRA: Can be rolled over into another Roth IRA or a Roth 401(k) if your employer’s plan allows it. Additionally, Roth IRAs offer greater portability, allowing you to choose your custodian and potentially access a broader range of investment options.
- Roth 401(k): Can be rolled over into a Roth IRA or another Roth 401(k) if you leave your job or retire. However, the availability of rollovers and portability options may vary depending on your employer’s plan rules. If your account balance falls below a certain dollar amount when you terminate employment then you may be forced to move your account elsewhere.
5. Required Minimum Distributions (RMDs):
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- Roth IRA: There are required minimum distributions during the original account holder’s lifetime. This provides greater flexibility in coordinating withdrawals in retirement from different account types. Inherited Roth IRAs will have RMDs for the beneficiary, but those withdrawals will still be tax free.
- Roth 401(k): Starting in 2024, Roth 401(k)s no longer have RMDs. This provides accounts owners with more options when retiring as to whether they want to keep the 401(k) where it is or roll it into a Roth IRA.
BONUS!!
Are you wondering if you have to choose one or the other? If you are below the Roth IRA income level then you can actually max out BOTH a Roth IRA and a Roth 401(k) each year that you remain below the income level. Coupling these two savings strategies together can create some serious tax-free money in retirement.
Final Thoughts
Both Roth IRA and Roth 401(k) accounts offer unique advantages and cater to different retirement planning needs. Understanding the differences between them is essential for maximizing your retirement savings potential. Whether you opt for a Roth IRA or a Roth 401(k), the key is to start saving early, take advantage of employer matches (if available), and make informed investment decisions to secure a comfortable retirement future.
Contact Crest Wealth Advisors today to create a retirement saving strategy that maximizes all options available to you.