In retirement planning, the Roth 401(K) and the Roth IRA are strategic tools. They allow for tax free growth and distribution. They are the pocket of money that doesn’t increase tax brackets or Medicare premiums.
While they both grow tax free, they have other attributes that are NOT similar. The chart below lays out how the Roth can be used as an IRA or 401(K).
| Great tax benefit | Roth IRA | Roth 401(K) |
| After tax contribution but it grows tax free | Voluntary contribution | Salary deduction |
| Distributions are tax free if held for 5 years | ·Access to tax free contributions before age 59-1/2 ·100% tax free after age 59-1/2 |
Tax free access only after age 59-1/2 |
| They are subject to annual dollar limits for 2024 | $7,000 under age 50 $8,000 over age 50 |
$23,000 under age 50 $7,500 additional over age 50 ($30,500 total) applies to the aggregate of pre-tax and after-tax contributions |
| They are subject to income limits | 2024 limits – Full contribution: ·Under $146,000 Single filer ·Under $230,000 Married filing joint |
No income limit |
| Your retirement accounts are protected from creditors | Limited to credit protection provided by the state | Unlimited protection if it’s part of an ERISA plan |
| Access to your account | No loans allowed | Employee can borrow against their account |
| Matching contributions | Custodian won’t match Roth contributions | Many 401(K) plans will match employee contributions |
| Investment choices | Unlimited investment choices | Restricted to the plan investment choices |
| Disbursements from the account | ·After 5 years, contribution amounts can be withdrawn ·Earnings may be taxable and subject to penalties |
Early distribution penalty if before age 59-1/2 |
Making a Roth 401(K) contribution has no impact on your ability to make a Roth IRA (or traditional IRA). They are not aggregated.
Beginning in 2024, both the Roth IRA and the Roth 401(K) are not subject to Required Minimum Distributions (RMD).
Roth IRAs and Roth 401(K)s are both great strategic tools you can use in your retirement planning. You can call our office for assistance in how to use Roths in your retirement planning.