Roth 401(k) vs Roth IRA- Which is the Better Retirement Plan for You?

The Mather Group

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Roth 401(k) vs Roth IRA: Which is the Better Retirement Plan for You?

The good news for Americans who want to save more money for retirement is that there is a wide range of tax-advantaged retirement savings plans to choose from. Two of the most popular are Individual Retirement Accounts (IRAs) and 401(k) plans.

If you decide on one of these as your preferred retirement savings vehicle, you’ve got another decision to make: Should you choose a traditional or Roth plan?

In 2006, Congress introduced the Roth 401(k) as an alternative to the popular Roth IRA, which had already been available for nearly a decade. Roth 401(k)s and Roth IRAs are similar to each other, but there are key differences that must be understood to make the right choice.

Similarities Between Roth 401(k) and Roth IRA Plans

Both types of accounts allow retirement savings to grow without being taxed, which can result in a larger account balance at retirement. Also, you can generally withdraw money from Roth 401(k)s and Roth IRAs income-tax free once you reach age 59½ since taxes have already been paid on these funds. This can result in having more disposable income during retirement.

Differences Between Roth 401(k) and Roth IRA Plans

Now, the differences, starting with the annual contribution limits, which are much higher with Roth 401(k)s than Roth IRAs. In 2019, the annual contribution limit for Roth 401(k)s is $19,000, or $25,000 for those 50 years of age or over. In comparison, the annual contribution limit this year for Roth IRAs is just $6,000, or $7,000 for those 50 years of age or over.

In other words, you can contribute more than three times more money each year to a Roth 401(k) than you can to a Roth IRA.

Roth IRA Eligibility

Another big difference between Roth 401(k)s and Roth IRAs is eligibility criteria. If your modified adjusted gross income (MAGI) is more than $137,000 (if you’re single) or $203,000 (if you’re married) in 2019, you cannot open or fund a Roth IRA. But you can open a Roth 401(k) regardless of your MAGI.

Of course, this assumes that your employer offers a Roth 401(k), which is another big difference between the two types of accounts. You can open a Roth IRA on your own, but Roth 401(k)s can only be opened via an employer.

The good news here is that some employers match employee contributions to Roth 401(k)s up to a certain percentage. Employer matches represent a guaranteed return on investment because there’s no risk involved. Note that matching contributions to Roth 401(k)s are deposited into a traditional 401(k) account, so you must have both of these.

Yet another important difference is that with Roth 401(k)s, you must start taking Required Minimum Distributions (or RMDs) once you reach age 70½. However, RMDs aren’t required with Roth IRAs.

So Which Retirement Savings Account is Better?

Now that you understand the main differences between Roth 401(k)s and Roth IRAs, you’re better equipped to decide which type of retirement savings account is the right choice for you.

Generally speaking, you may be better off with a Roth 401(k) if your MAGI is too high to open a Roth IRA, you want to make larger annual contributions and you want to receive an employer match. A Roth 401(k) might also make more sense if like the fact that you can easily sign up at work and have contributions automatically deducted from your paycheck.

On the flip side, you may be better off with a Roth IRA if your employer doesn’t offer a Roth 401(k), you don’t want to be faced with taking RMDs when you reach age 70½ or you want access to a wider range of investment options than Roth 401(k)s typically offer. Also, Roth IRAs generally allow withdrawals of up to $10,000 before age 59½ without taxation or penalties for first-time home purchases. With a Roth 401(k), you’d have to take out a plan loan to accomplish this.

Talk to Your Financial Advisor

There are pros and cons to both Roth 401(k)s and Roth IRAs that you should understand before deciding which account is best for your situation. The Mather Group can help you examine the better option for you based on your personal goals.

The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. The information and data in this communication does not constitute investment, or other professional advice. The Mather Group makes no warranty or representation, express or implied, nor does The Mather Group accept any liability, with respect to the information and data set forth herein. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and risk tolerance.


The Mather Group



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