Both Roth 401(k) accounts and Roth individual retirement accounts (IRAs) allow you to make "after-tax" retirement contributions. This means you contribute money that has already been taxed, so your contributions are not tax-deductible in the year they are made.
The significant advantage to these types of accounts is that your contributions grow tax-deferred – and with a qualified withdrawal, earnings will be distributed tax-free, as well. This can be particularly beneficial if you anticipate being in a higher tax bracket during retirement than you are today.
Here’s what you should know to help you determine if Roth contributions may be right for your retirement savings strategy.
Who can contribute to Roth accounts?
Roth 401(k): Roth 401(k) contributions are made as employee contributions (deferrals) and, aside from taxation, they generally follow the same rules as pre-tax deferrals. Eligibility to contribute to a Roth 401(k) is tied to your employment. You can only contribute to a Roth 401(k) if your employer offers it as part of their retirement plan and you meet eligibility requirements (typically related to age or years of service with the employer). There are no income limitations imposed by the IRS for contributing to a Roth 401(k).
Roth IRA: Individuals with earned income can generally contribute to a Roth IRA, provided they meet specific income limitations set by the IRS. These income limits are subject to annual adjustments and determine whether you can make a full, partial, or no contribution in a given year. Unlike a Roth 401(k), a Roth IRA is an individual account and is not tied to employer sponsorship.
Key differences of Roth 401(k) vs. Roth IRA
The following chart highlights key distinctions between a Roth 401(k) and a Roth IRA.
Feature | Roth 401(k) | Roth IRA |
Availability | Offered by employers as part of a 401(k) plan. | Open to anyone meeting the IRS income requirements. |
Contribution limits | Higher contribution limits than IRAs.
401(k) limits are combined across Roth, pre-tax and certain other plans.
See the current year contributions limits here. | Lower limits than 401(k) accounts.
IRA limits are combined across Roth and traditional contributions.
See the current year contributions limits here. |
Contribution method | Direct payroll deductions. | Personal checking or savings account withdrawals. |
Income limits | No upper income limits. | Income limits apply. Your modified adjusted gross income (MAGI) determines whether you are eligible to make contributions. |
Withdrawal rules | Set by the 401(k) plan. Generally, employee contributions (deferrals) cannot be distributed before age 59½, termination from service, or a hardship. | IRAs are distributable at any time.
There are limits on certain types of movement between IRA accounts. |
Taxation of distributions | Contributions are always distributed tax and early withdrawal penalty free.
Earnings are distributed tax free if it is a qualified distribution.
Earnings are subject to the normal early withdrawal penalty tax rules.
Distributions are always equal parts contributions (basis) and earning. | Contributions are always distributed tax and early withdrawal penalty free
Earnings are distributed tax free if it is a qualified distribution.
Earnings are subject to the normal early withdrawal penalty tax rules.
There are specific ordering rules used to determine what portion of a distribution is contributions (basis) and what is earning. |
5-year measurement time frame | Is specific to the plan and starts with the first Roth contribution made to the plan (deferral, rollover, employer contribution, or conversion). | Is a single time frame for all Roth IRAs you may have and starts with the first contribution made to any Roth IRA you have (including conversions). |
Qualified distribution events | Age 59 ½; death; disability. | Age 59 ½; death; disability; first time home purchase ($10,000 lifetime limit). |
Required Minimum Distributions (RMDs) | No RMDs. | No RMDs. |
Loans | Your employer's plan may allow you to borrow from your Roth 401(k) balance. | You cannot take a loan from a Roth IRA. |
Can you have both a Roth 401(k) and Roth IRA?
Yes! If you are eligible to participate in a Roth 401(k) plan offered by your employer and you meet the income requirements to contribute to a Roth IRA, you can contribute to both in the same year. Because the contribution limits for each are determined independently, this strategy can help maximize your tax-free retirement savings.
With Guideline, both our 401(k) plans and IRAs offer the ability to make Roth contributions.
This information is provided for illustrative purposes only, and is not intended to be taken as investment or tax advice. Consult a qualified tax and financial advisor to determine the appropriate investment strategy, investment, or managed portfolio for you.