Q. Which is better - Roth IRA or Roth 401K?
A. It depends on your unique situation. Generally, if you are eligible for Roth IRA, you need to take advantage of it; if you are not eligible for Roth IRA, you need to evaluate Roth 401K vs. regular 401K, you can use our free calculator to do that.
Below are some of the differences between Roth IRA and Roth 401k:
Distributions
Distributions of earnings from a Roth 401(k) will be tax free if taken after age 59 ½ and it has been five tax years or more since Jan. 1 of the year you first contributed to the Roth 401(k). Withdrawals can only be made, if you are eligible for a distribution from the 401(k) (death, disability, separation from service)
Withdrawals from a Roth IRA can be taken at any time in the following order: Contributions, converted amounts, earnings. Withdrawals of contributions are always tax free. Generally, converted amounts and earnings are tax free if the applicable five-year rules are satisfied and taken after age 59 1/2.
Required Minimum Distributions (RMD)
RMDs are required from Roth 401(k)s once your reach age 70 1/2, unless you are still employed by the company providing the 401(k) then and less than a 5% owner. Once such employment ends, RMDs are applicable.
No RMDs are required from your Roth IRAs during your lifetime.
Contribution eligibility
If your 401(k) offers a Roth option, all employees eligible to contribute to the 401(k) may contribute to the Roth regardless of their income.
A maximum contribution to a Roth IRA is limited to persons who have earned income of $5,500 or more but an Adjusted Gross Income (AGI) under $114,000 for singles, $181,000 for joint filers. Single filers with an AGI above $129,000 and joint filers with an AGI over $191,000 cannot make a Roth contribution.
Contribution amounts
For 2014, Roth 401(k) contributions are limited to the lesser of 100% of wages or $17,500 ($23,000 if over age 50)
Roth IRA contributions are limited to the lesser of 100% of wages or $5,500 ($6,500 if over 50)
Matching
Contributions to a Roth 401(k) may be eligible for a matching contribution from your employer.
No match is made to Roth IRAs.
Conversions
Moneys inside a 401(k) can only be converted to the Roth 401(k) if the plan specifically allows such conversions. Conversions to Roth 401(k) cannot be reversed or "recharacterized.”
Any of your IRA moneys, other than those subject to Required Minimum Distributions, can be converted to a Roth IRA. Conversions can be recharacterized as late as Oct.15 of the year after the year of conversion.
A. It depends on your unique situation. Generally, if you are eligible for Roth IRA, you need to take advantage of it; if you are not eligible for Roth IRA, you need to evaluate Roth 401K vs. regular 401K, you can use our free calculator to do that.
Below are some of the differences between Roth IRA and Roth 401k:
Distributions
Distributions of earnings from a Roth 401(k) will be tax free if taken after age 59 ½ and it has been five tax years or more since Jan. 1 of the year you first contributed to the Roth 401(k). Withdrawals can only be made, if you are eligible for a distribution from the 401(k) (death, disability, separation from service)
Withdrawals from a Roth IRA can be taken at any time in the following order: Contributions, converted amounts, earnings. Withdrawals of contributions are always tax free. Generally, converted amounts and earnings are tax free if the applicable five-year rules are satisfied and taken after age 59 1/2.
Required Minimum Distributions (RMD)
RMDs are required from Roth 401(k)s once your reach age 70 1/2, unless you are still employed by the company providing the 401(k) then and less than a 5% owner. Once such employment ends, RMDs are applicable.
No RMDs are required from your Roth IRAs during your lifetime.
Contribution eligibility
If your 401(k) offers a Roth option, all employees eligible to contribute to the 401(k) may contribute to the Roth regardless of their income.
A maximum contribution to a Roth IRA is limited to persons who have earned income of $5,500 or more but an Adjusted Gross Income (AGI) under $114,000 for singles, $181,000 for joint filers. Single filers with an AGI above $129,000 and joint filers with an AGI over $191,000 cannot make a Roth contribution.
Contribution amounts
For 2014, Roth 401(k) contributions are limited to the lesser of 100% of wages or $17,500 ($23,000 if over age 50)
Roth IRA contributions are limited to the lesser of 100% of wages or $5,500 ($6,500 if over 50)
Matching
Contributions to a Roth 401(k) may be eligible for a matching contribution from your employer.
No match is made to Roth IRAs.
Conversions
Moneys inside a 401(k) can only be converted to the Roth 401(k) if the plan specifically allows such conversions. Conversions to Roth 401(k) cannot be reversed or "recharacterized.”
Any of your IRA moneys, other than those subject to Required Minimum Distributions, can be converted to a Roth IRA. Conversions can be recharacterized as late as Oct.15 of the year after the year of conversion.
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