Understanding the difference can make a impact in these tax-advantage retirement tools.
The main differences between a Roth 401(k) and a Roth IRA lie in their features, contribution limits, and eligibility criteria. Here’s a brief comparison:
- Type of Account:
- Roth 401(k): This is a retirement savings account offered by employers as part of a 401(k) plan. Contributions are made with after-tax dollars, and withdrawals in retirement are tax-free.
- Roth IRA: This is an individual retirement account that individuals can open on their own. Like the Roth 401(k), contributions are made with after-tax dollars, and qualified withdrawals are tax-free.
- Employer-sponsored vs. Individual:
- Roth 401(k): Sponsored by employers, and individuals can contribute through payroll deductions.
- Roth IRA: Opened and managed by individuals independently.
- Contribution Limits:
- Roth 401(k): Higher contribution limits compared to Roth IRA. The limits are set annually by the IRS. Currently at $20,500 or if after age 50 $27,000 per year.
- Roth IRA: Lower contribution limits compared to Roth 401(k). Also set annually by the IRS. Currently at $6,000 or if after age 50 $7,000 per year.
- Income Limits:
- Roth 401(k): There are no income limits for contributing to a Roth 401(k).
- Roth IRA: There are income limits that may restrict high-income earners from contributing directly to a Roth IRA. However, there are backdoor Roth IRA strategies available for those above the income limits.
- Employer Match:
- Roth 401(k): Employers may match contributions to a Roth 401(k), but their contributions go into a traditional 401(k) account, not a Roth.
- Roth IRA: There is no employer match as it is an individual account.
- Required Minimum Distributions (RMDs):
- Roth 401(k): RMDs are required after the account holder reaches age 72.
- Roth IRA: Roth IRAs do not have RMDs during the account owner’s lifetime.
- Portability:
- Roth 401(k): If you change jobs, you can roll over your Roth 401(k) into a Roth IRA or another employer’s Roth 401(k).
- Roth IRA: Can be moved between financial institutions or rolled over from a traditional IRA.
It’s important to consider individual financial goals, investment options, and eligibility when choosing between a Roth 401(k) and a Roth IRA. Consulting with a financial advisor is recommended to make decisions aligned with your specific situation.