Roth IRA Vs. Roth 401(k)

by Mark Kennan ; Updated July 27, 2017

Roth IRA and Roth 401(k) plans are two investment vehicles for those saving for retirement. They offer similar tax advantages, but they differ in terms of eligibility, contribution methods, contribution limits and ways to withdraw the money. Roth IRAs are readily available, but Roth 401(k)s are only starting to become widespread because, until 2006, when the Pension Protection Plan was enacted, they were only going to be around until 2010. By understanding the differences, you can decide which plan is best for you.

Contribution Limits

One major difference between a Roth IRA and a Roth 401(k) is the amount you are allowed to contribute annually. For 2009, you could only contribute $5,000 to a Roth IRA. If you are 50 years or older, this limited the increased to $6,000. For Roth 401(k) plans, you could contribute up to $16,500. If you are 50 years or older, you can contribute an additional $5,500 for a total of $22,000.

How to Contribute

The contributions to a Roth 401(k) are made through your employer and are taken out of your pay check. For example, if you want to contribute $500 per month to a Roth 401(k), your employer would take $500 out of your monthly paycheck and make the contribution for you. If you wanted to make the contribution to a Roth IRA, you would make the contribution by yourself. Because of this, only Roth 401(k) plans have the potential for companies to match your contributions.

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Who Can Contribute

For a Roth IRA, only people who meet certain adjusted gross income restrictions can make contributions. For 2009, those who filed taxes as single or head of household could not make more than $101,000. Those who filed as married could not have a combined income of more than $159,000. If a single or head of household made between $101,000 and $116,00, or a married couple made between $159,000 and $169,000, your contribution limit gets phased down. There are no income restrictions on 401(k) plans.

Withdrawals

For a Roth 401(k) plan, you only have access to your contributions after your work with the company is terminated and you are at least 59 1/2 years old, unless you have a hardship exception, such as an IRS-qualified disability. Roth IRAs cannot be accessed without penalty until the age of 59 1/2 years old. Roth IRAs offer the same hardship withdrawal exceptions as Roth 401(k) plans and also offer an additional exception for paying for the expenses of a first house.

Tax Advantages

Both the Roth IRA and Roth 401(k) plans offer similar tax advantages. Contributions to these two plans are not tax deductible, but once the money is in the plan, it grows tax free. When the money is taken out at retirement, the earnings and base are still tax free. This makes these two plans more attractive to people who think they will be in a higher tax bracket at retirement than they will be in the contribution year.

About the Author

Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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