Roth 401K Vs Roth IRA

Beginning Jan 1, 2006, there is another option available for IRAs: The Roth 401K.

The Roth 401k is a hybrid of Roth IRA and the traditional 401k Plans. In a traditional 401K plan, employees contribute money before tax to the 401K plan. For instance if employee earned $60000 and contributed the maximum permissible $14,000 to a 401K then he would pay pay federal and state income taxes only on $46,000.The money invested in the 401K plan will grow and will be taxed as regular income when taken out at age 59.5 years or older.In the Roth 401K, the taxes are prepaid-in the abovementioned example, the person will pay taxes today on $60,000, but when he withdraws the money (and gains accrued) on this $14,000 they contributed to the Roth 401K after retirement, they will not pay any taxes on the withdrawals.

Advantages of Roth IRA 401K over Roth IRA

(1) higher contribution limits: The contribution limit for Roth 401K are much higher than Roth IRA

(2) Matching contributions: If your employer provides matching money for 401k contributions, you'll get that match regardless of whether you put your money in a traditional 401k account or a Roth 401k account. The matching money goes into your traditional 401k account even if you put your own contributions into a Roth 401k account.

Disadvantages of Roth IRA over Roth 401K

(1) Unlikek Roth IRA which you can set up anywhere, Roth 401K has limitations. In a Roth 401k, you have to choose from among the investments your employer offers. Your employer may offer you some funds, such as a stable value fund which you wouldn't be able to put in your IRA.The same goes with Traditional Roth 401K. At times this may work in your favor, as most companies make sure the choices include some high quality mutual funds that are suitable for retirement savings.

(2) Access to Your Money: Emergencies do happen. In a 401k account, you may not be able to take a distribution while you're still employed at the company that maintains the retirement plan.

(3) No recharacterization: When you contribute to a 401k account, your choice between a traditional account and a Roth account is irrevocable. You can change your choice for future contributions, but you can't undo your choice for contributions you already made as you can when you contribute to a Roth IRA. While in Roth IRA ou can change your mind later about the type of IRA that received the contribution.

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