The most common and powerful tools to help individuals save for retirement are IRA and 401(k) accounts. Both types also offer a “Roth” option, but most folks are not familiar with the similarities or differences between them, or know when a Roth is more advantageous tax wise for different stages of life. You might even want to set up a combination of accounts depending on your financial situation. Confused? We offer a straightforward comparison below of the similarities and differences between a Roth IRA and Roth 401(k):

 

Tax treatment: Roth 401(k)s and Roth IRAs let you save and invest dollars you’ve already paid taxes on and potentially make tax-free withdrawals (including any investment earnings) once you’re 59½ or older. With traditional IRAs and 401(k)s, you typically make contributions with pre-tax dollars, or you may be able to deduct your contributions from your taxable income. Then investments can grow tax-deferred, and you may pay income taxes on what you withdraw in retirement.

 

Income restrictions: Roth IRAs have strict income limits for eligibility based on your modified adjusted gross income. Roth 401(k)s, meanwhile, have no formal income limits. If your employer offers a Roth option, you can contribute no matter your income up to the greater of the plan’s limits or the 401(k) deferral limit.

 

Contribution limits: You can save much more per year using a Roth 401(k) than a Roth IRA. Here’s how the contribution limits compare for 2024:

 

Roth IRA

• Under age 50: $7,000
• Age 50+: $8,000

Roth 401(k)

• Under age 50: $23,000
• Age 50+: $30,500

 

With Roth IRAs, you cannot contribute more than your earned income each year. If you have a Roth 401(k), you cannot contribute more than what you earn at the company that holds your plan.

Note: Starting in 2026, the SECURE Act 2.0 will require catch-up contributions to be Roth for those who made more than $145,000 (adjusted for inflation) in the prior year.

 

Withdrawals before retirement: With most retirement accounts, you can’t access the money you contribute or any investment earnings before retirement age without incurring a 10% early withdrawal penalty, plus any applicable income taxes.

A Roth IRA lets you access your contributions before retirement without penalty according to certain rules. If you want to withdraw investment earnings without tax or penalty before age 59½, at least 5 years must elapse between the beginning of the tax year of your first contribution, and you must also meet one of the approved exceptions. Otherwise, you are subject to the standard 10% early withdrawal penalty plus any applicable income taxes on previously untaxed dollars (your investment earnings).

For a Roth 401(k), you may be able to avoid early withdrawal penalties if the withdrawals qualify as a hardship withdrawal. If your plan allows you to make a non-hardship early withdrawal from your Roth 401(k), you’ll likely need to make a “pro-rata” withdrawal that combines contributions and earnings and represents a proportion of earnings each contributed dollar has made. This means a withdrawal that includes your previously untaxed earnings, which might be taxed or penalized, depending on the situation for your withdrawal.

 

Withdrawals during retirement: You may have to pay income taxes on the earnings you take out if you’ve made your first contribution within the last 5 tax years. However, you will not have to pay a 10% early withdrawal penalty on any earnings withdrawn after age 59½.

 

Employer contributions and matches: With employer-sponsored retirement plans, like Roth 401(k)s, your company may make contributions on your behalf, known as matching contributions, which require you to contribute a certain amount yourself that your employer then matches as a preset percentage or amount.

It’s important to note that currently employer contributions and matches can only be made to pre-tax accounts. So if you are contributing to a Roth 401(k), your employer would have to make its matching contribution on a pre-tax basis. Once the contributions are fully vested and if your plan allows, you could move them to a Roth account later, though you might have to pay income taxes on the amount rolled over.

 

Investment selection: Only you can contribute to a Roth IRA. You may find a wide range of investment options when you invest with a Roth IRA over a Roth 401(k). With a Roth 401(k), you’re limited to the investments your employer chooses to include in its plan’s investment lineup. But because you have options with a Roth IRA, you can choose what you prefer to invest in.

 

Plan loans: While not all employers offer the option, your Roth 401(k) could give you the ability to borrow from your account through a 401(k) loan. If this option is available, you could borrow up to 50% of your balance up to $50,000. In most cases, if you don’t pay the loan back within 5 years or you are unable to repay within a preset amount of time when you leave your company, your loan counts as a withdrawal and could be subject to taxes and penalties. Roth IRAs do not offer a similar feature, though you do have the option of withdrawing contributions tax-free at any time (rules apply).

 

Required minimum distributions (RMDs): Almost all retirement accounts are subject to forced distributions called required minimum distributions, or RMDs. These kick in when you turn 73 or stop working at the job offering the plan, whichever comes later, and they must be withdrawn whether you need the money or not. Otherwise, you may owe a tax penalty equal to 25% of the amount you were supposed to have withdrawn. If, however, you correct your mistake and take your RMD within 2 years of when you were intended to, then the penalty is further reduced to 10%.

Roth IRAs are not subject to RMDs, and starting in 2024, neither are Roth 401(k)s. This could make Roth accounts more popular in estate planning, as they could benefit from potential compound growth by remaining undisturbed for a longer period, and can be inherited without requiring the beneficiary to pay taxes on withdrawals.

 

Can you have a Roth 401(k) and Roth IRA? YES, you can have both. If you have a Roth 401(k) at work and you meet the income requirements to contribute to a Roth IRA, you can contribute to both. How you plan contributions to each depends on your financial goals. Be sure to consider the benefits and limitations of each type of account, detailed above, when deciding how much to save in each.

Helpful IRS Comparison chart for Roth 401(k), Roth IRA, and pre-tax 401(k) retirement accounts: https://www.irs.gov/retirement-plans/roth-comparison-chart

 

Reach Out to Us: It’s never too early to start planning for retirement! TFG Financial Advisors wants to make sure you are aware of the different financial vehicles you can use to save your hard earned money now, in order to be able to live the life you want later. Despite both being called “Roth,” Roth IRAs and Roth 401(k)s offer very different pathways to tax-free withdrawals in retirement. Our TFG Financial Advisors can provide a road map for retirement planning, and educate you as to which of these 2 accounts fits best with your goals. The earlier you contribute, the more time your money has to grow. We have other great ideas to help grow your nest egg. Contact Cory Lyon, TFG Financial Advisor, at 561-209-1120 or clyon@tfgfa.com.

 

TFG Financial Advisors, LLC, is registered as an investment adviser with the SEC. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. The firm is not engaged in the practice of law or accounting. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. You should consult with a professional advisor before implementing any strategies discussed. Content should not be viewed as an offer to buy or sell any of the securities mentioned or as legal or tax advice. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Tax rules and regulations are subject to change at any time. All investment strategies have the potential for profit or loss.

TFG Financial Advisors, LLC, is registered as an investment adviser with the SEC. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. The firm is not engaged in the practice of law or accounting. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. You should consult with a professional advisor before implementing any strategies discussed. Content should not be viewed as an offer to buy or sell any of the securities mentioned or as legal or tax advice. It is not affiliated with or endorsed by the Social Security Administration or Medicare. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Tax rules and regulations are subject to change at any time. All investment and insurance strategies have the potential for profit or loss. Information presented is believed to be current. Photos and videos are used for the singular purpose of enhancing the website. None of them are photographs of current or former clients. Hyperlinks on this website are provided as a convenience. We cannot be held responsible for information, services or products found on websites linked to ours.