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Roth IRA vs. Roth 401(k)

February 27, 2024

Every choice has pros and cons. What is a good choice for me may not be your best choice. The same is true with investing. Choosing a suitable investment is not a one-size-fits-all solution, so knowing what you are purchasing or investing in is essential.

The Roth option was among the few gifts Congress gave the American people. Having tax-free growth and distributions from a retirement account at a time when many believe taxes are on the rise is a blessing. However, not all Roth accounts are created the same, and it is crucial to know the differences to make the best investment choice for yourself. The Roth IRA and the Roth 401(k) are popular options among investors. Understanding their nuances can be the difference between a good choice and a great choice when it comes to retirement income planning.

How much can I contribute?

Both plans have contribution limits, but the Roth 401(k) has an advantage. In the Roth 401(k), you can contribute $23,000 to your account each year, and if you are older than 50, that limit goes up to $30,000. In the Roth IRA, you can contribute $6,500 a year, and at age 50, that limit goes up to $7,500.

What are my investment options?

When it comes to investment options, the Roth IRA has an edge, offering hundreds of options to choose from. In the Roth 401(k), you are limited to the 10-15 options in your employer’s plan.

Who is allowed to invest?

For high-income earners, there are better options than the Roth IRA. You are ineligible for this plan if you are single with an adjusted gross income of $154,000 a year or married with an adjusted gross income of $228,00 a year. Thankfully, high-income earners can contribute to a Roth 401(k) because there are no income limits.

Am I required to take distributions in retirement?

Once you enter retirement, investment accounts become a vital source of income. One significant benefit of the Roth IRA is that there are no required minimum distributions (RMD) from the account. Since they are funded with money that has already been taxed, the federal government isn’t looking to collect their portion. Some see these accounts as legacies they wish to leave to their children or beneficiaries. With the outlook of generational wealth, these accounts can be invested more aggressively to maximize their growth potential. When it comes to the Roth 401(k), many assume a minimum distribution from this account is required. This is where working with an experienced financial advisor, who stays up to date with the current legislation, can help manage retirement income. In 2022, Congress passed Secure Act 2.0. One of the benefits of this legislation was that starting in 2024, retirees are no longer required to take distributions from this account. So, in essence, Roth 401(k)s act just like a Roth IRA! Also, in 2024, employers can put their contribution into your account in Roth form where as before, it went into a pre-tax account.

At the end of the day, both the Roth IRA and the Roth 401(k) are great investment options. Both accounts provide you with income to fund your go-go years. Working with a financial advisor lets you determine which options are best for you.