Dollars & Sense: Roth 401k vs Roth IRA
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Dollars & Sense: Roth 401k vs Roth IRA
When it comes to saving for retirement, there are several options available. Two popular choices include the Roth 401k and the Roth IRA. Both of these retirement savings accounts offer tax advantages, but they also have some key differences. In this article, we will explore the features and benefits of each to help you make an informed choice.
1. Contributions:
One significant distinction between Roth 401k and Roth IRA lies in the contribution limits. As of 2021, the contribution limit for a Roth 401k is $19,500, while individuals above the age of 50 can contribute an additional $6,500 as a catch-up contribution. On the other hand, Roth IRA contributions cannot exceed $6,000, with an additional $1,000 catch-up contribution allowed for those aged 50 and over. Therefore, if you want to maximize your contributions, the Roth 401k may be the better option.
2. Employer Match:
Another crucial factor to consider is the employer match. With a Roth 401k, your employer has the potential to match a portion of your contributions, which effectively boosts your savings. The employer match is essentially free money that can significantly accelerate your retirement savings. Unfortunately, Roth IRAs do not offer any employer match since they are individual accounts. If your employer offers a matching program, a Roth 401k can be an attractive choice.
3. Investment Options:
Both Roth 401ks and Roth IRAs provide various investment options tailored to individual preferences. However, Roth IRAs offer more flexibility in this arena. With a Roth IRA, you have the freedom to invest in individual stocks, bonds, mutual funds, exchange-traded funds (ETFs), and even real estate investment trusts (REITs). Roth 401ks, on the other hand, typically offer only a predetermined selection of investment choices. If you desire more control over your investments, a Roth IRA may be preferable.
4. RMDs and Early Withdrawals:
Required minimum distributions (RMDs) are an important aspect to consider as you approach retirement age. Roth IRAs have no mandatory RMDs, allowing you to keep your money invested for as long as you wish, allowing for potential growth. On the contrary, with Roth 401ks, you must begin taking RMDs starting at age 72 (or 70 ½ if you reached this age prior to 2020). If you prefer to maintain control over when and how much you withdraw, a Roth IRA might be a more strategic option.
Moreover, early withdrawals are subject to different rules. With a Roth IRA, you can withdraw contributions penalty-free at any time, while earnings may be subject to taxes and penalties if withdrawn before age 59 ½ or meet specific requirements. Roth 401ks, on the other hand, often impose penalties and taxes on all early withdrawals. Consider your potential need for early access to funds before deciding which account is right for you.
In conclusion, choosing between a Roth 401k and a Roth IRA largely depends on your personal circumstances and financial goals. If you have a high income and want to maximize contributions, a Roth 401k might be the better option. Conversely, if you desire more investment flexibility or wish to avoid RMDs, a Roth IRA may be preferable. It is always wise to consult with a financial advisor who can assess your unique situation and guide you towards the retirement savings account that aligns with your long-term objectives.
She's Definitely a Blonde
I’d be retiring or working less in 5 years, and considering this financial recession, I’m curious to know best how people split their pay, how much of it goes into savings, spendings or investments, I earn around $250K per year but nothing to show for it yet.
Something you miss is that you can have both, but you cannot claim the tax deduction or adjustment to income on a Regular Roth IRA if you are covered by an employer retirement plan.
Roth 401k has fees..if no natch .max roth ira first
I think you are wrong about not being able to max out both Roth 401K and Roth IRA in a single year.
This answer from the IRS website:
Can I contribute the maximum, including catch-up contributions, to both a designated Roth account and a Roth IRA in the same year?
Yes, for 2022, if you are age 50 or older, you can make a contribution of up to $27,000 to your 401(k), 403(b) or governmental 457(b) plan ($20,500 regular and $6,500 catch-up contributions) and $7,000 to a Roth IRA ($6,000 regular and $1,000 catch-up IRA contributions) for a total of $34,000. Income limits apply to Roth IRA contributions, however. For 2023, if you are age 50 or older, you can make a contribution of up to $30,000 to your 401(k), 403(b) or governmental 457(b) plan ($22,500 regular and $7,500 catch-up contributions) and $7,500 to a Roth IRA ($6,500 regular and $1,000 catch-up IRA contributions) for a total of $37,500. Income limits apply to Roth IRA contributions, however.