Roth 401(k) vs Roth IRA: Should You Have One or Both?

Individual retirement accounts (IRAs) and 401(k) accounts are both excellent vehicles for saving for retirement. Beyond traditional IRAs and 401(k)s, Roth accounts can be a good option to consider in addition to or instead of traditional retirement savings accounts.

In terms of Roth accounts, which type is best? We will look at Roth 401(k) vs. Roth IRA options and provide some information to help you decide based on your situation.

Roth 401(k) vs. Roth IRA: A quick comparison

	Roth 401(k)	Roth IRA
Tax on contributions	Contributions are after-tax; there is no upfront tax benefit.	Contributions are after-tax; there is no upfront tax benefit.
Tax on withdrawals	No taxes on withdrawals if certain requirements are met.	No taxes on withdrawals if certain requirements are met.
Mandatory withdrawal age	Required minimum distributions (RMDs) are required.	RMDs are not required.
Early withdrawal penalties	Early withdrawal penalties on investment gains under certain circumstances	Early withdrawal penalties on investment gains under certain circumstances
Loans	Loans may be available	No loans available
Income limits	No income limits for contributions.	Income limits based on marital status
Annual contribution limit (for tax year 2023)	$22,500 for those under 50 $30,000 for those 50 or over	$6,500 for those under 50 $7,500 for those 50 or over
Annual contribution limit (for tax year 2024)	$23,000 for those under 50 $30,500 for those 50 or over	$7,000 for those under 50 $8,000 for those 50 or over

Roth 401(k): The basics

Roth 401(k) options, also known as designated Roth accounts, are being offered by a growing number of 401(k) plans. Here are some fundamentals regarding how a Roth 401(k) works.

Contributions to a Roth 401(k) are made with after-tax dollars, so there’s no reduction in your taxable income during a given year. This is in contrast with contributions to a traditional 401(k) account, which are generally made with pre-tax dollars. This means that you receive a tax benefit for your contributions to a traditional 401(k) in a given year.

However, if certain requirements are met, there are no income taxes on distributions from a Roth 401(k) in retirement, whereas distributions on a traditional 401(k) are subject to state and federal income taxes.

In terms of maximum contributions set by the IRS, the maximum annual Roth 401(k) contribution is equal to the 401(k) contribution limits for 2024. These maximums increase from time to time, and the maximum Roth 401(k) contribution will increase accordingly. The limits for 2023 are:

• $22,500 for those under the age of 50
• $30,000 for those 50 or over at any point during 2023

The limits for 2024 are:

• $23,000 for those under the age of 50
• $30,500 for those 50 or over at any point during 2024
  

Typically, Roth 401(k)s are subject to RMDs that currently begin at 72. But if you are still working, you are not required to take RMDs from your current employer’s 401(k) as long as you are not a 5% or greater owner of the company and your employer has made the appropriate election in the plan documents.

When you make a qualified withdrawal from your Roth 410(k), you typically don't have to pay taxes on it or early withdrawal penalties. Qualified withdrawals mean the account holder has met the following eligibility criteria:

• The account holder is at least age 59 1/2
• The account holder’s first contribution to the account was made at least five years prior.
• Withdrawals made because of the disability or death of the account holder. In the latter case, the money would go to their beneficiaries.

If you make a withdrawal before age 59 1/2 and haven’t met the five-year rule, you’ll be subject to taxes on any gains in the account, though there are no penalties in this case. Withdrawals made before age 59 1/2 and where the five-year rule has not been met will be subject to both taxes and an early withdrawal penalty.

Note your contributions to the account are never taxed, and you can typically take a loan from your Roth 401(k) if your plan allows you to do so.

Roth 401(k) pros

• No income restrictions limiting contributions
• Qualified withdrawals are tax-free
• Loans may be available
• Contributions grow tax-free
• Offers tax diversification from traditional retirement accounts

Roth 401(k) cons

• Subject to RMDs

Roth IRA: The basics

Roth IRAs are one of two IRA types. When compared with a traditional IRA, there are some similarities but also several key differences.

Contributions to a Roth IRA are made with post-tax dollars. This is in contrast with contributions to a traditional IRA account, which are generally made with pre-tax dollars and could result in tax savings during a given year. Sometimes, though, the contributions might be made on an after-tax basis. Qualified Roth IRA distributions won't generally be subject to tax in retirement, whereas pre-tax contributions to a traditional IRA will typically be taxed as ordinary income.

Roth IRAs are subject to annual IRA contribution limits, which are $6,500 for those under 50 in 2023 and $7,000 in 2024. Those over age 50 can contribute $1,000 more for catch-up contributions. These limits change from time to time, and it’s important to note that limits are for total contributions to all IRA types, whether Roth, traditional, or a combination of the two.

Contributions to a Roth IRA are subject to income limitations; if your income exceeds these limits, you won’t be able to make contributions. For 2023, these income limits are:

Married filing jointly or qualified widow

Modified adjusted gross income (MAGI) < $218,000	$6,500 for those under 50 $7,500 for those over 50 in 2023
MAGI between $218,000 and $228,000	Phased contribution limits
MAGI above $228,000	No contributions allowed

Single filers, head of household, married filing separate (not living with spouse)

MAGI < $146,000	$6,500 for those under 50 $7,500 for those over 50 in 2023
MAGI between $138,000 and $153,000	Phased contribution limits
MAGI above $153,000	No contributions allowed

Married couple, filing separately and lived with spouse at any time during the year

MAGI < $10,000	A reduced amount
MAGI above $10,000	No contributions allowed

The income limits are increasing for the tax year 2024. The new income limits are:

Married filing jointly or qualified widow

Modified adjusted gross income (MAGI) < $230,000	$7,000 for those under 50 $8,000 for those over 50 in 2024
MAGI between $230,000 and $240,000	Phased contribution limits
MAGI above $240,000	No contributions allowed

Single filers, head of household, married filing separate (not living with spouse)

MAGI < $146,000	$7,000 for those under 50 $8,000 for those over 50 in 2024
MAGI between $146,000 and $161,000	Phased contribution limits
MAGI above $161,000	No contributions allowed

Married couple, filing separately and lived with spouse at any time during the year

MAGI < $10,000	A reduced amount
MAGI above $10,000	No contributions allowed

Although there are income limits in place for Roth IRAs, you may be able to make Roth contributions with a backdoor Roth. A backdoor Roth is a way for those whose income is too high to make a Roth IRA contribution. It involves making an after-tax contribution to a traditional IRA and then converting that money to a Roth IRA.

Whether the conversion is taxable will depend upon whether you have other money in a traditional IRA account.

Unlike with a Roth 401(k) account, there are no RMDs with a Roth IRA and no other withdrawal requirements. Qualified distributions are also tax and penalty-free. For qualified distributions, you must have met the five-year rule since your first Roth IRA contribution and meet one of these requirements:

• You are at least age 59 1/2
• The distribution is taken on account of your disability
• The distribution is taken by your beneficiaries in the event of your death
• The distribution is to buy or build your first home or that of specified family members up to a $10,000 limit

If you are at least 59 1/2 but have not met the five-year rule, any distributions you take will generally be subject to taxes, but not the 10% withdrawal penalty. However, if you are younger than age 59 1/2, distributions will typically be subject to taxes and penalties, with these exceptions if you have met the five-year rule:

• The distribution is taken on account of your disability
• The distribution is taken by your beneficiaries in the event of your death
• The distribution is to buy or build your first home or that of specified family members up to a $10,000 limit

If you are under age 59 1/2 but have not been contributing to your account for five years, any distributions you take are generally subject to taxes and the penalty. These exceptions could allow you to avoid the penalty but not the taxes:

• The distribution is taken on account of your disability
• The distribution is taken by your beneficiaries in the event of your death
• The distribution is to buy or build your first home or that of specified family members up to a $10,000 limit
• Unreimbursed medical bills
• Health insurance premiums if you are unemployed
• Expenses related to the birth or adoption of a child

Roth IRA pros

• No RMDs
• Estate planning benefits under the SECURE Act rules
• Tax-free growth for contributions
• Offers tax diversification from traditional retirement accounts

Roth IRA cons

• Income limitations for contributions

How to choose between a Roth 401(k) vs. Roth IRA

If you are comparing Roth 401(k) vs. a Roth IRA, the answer may be that you don’t have to choose. You can typically contribute to both types of accounts if you are eligible and if your company’s 401(k) plan offers a Roth option. Here are some things to consider.

For those who earn too much to contribute to a Roth IRA, the Roth 401(k) is a great option in that there are no income caps on the ability to contribute.

When choosing between the two, one consideration might be the quality of investment options such as mutual funds available to you in your company’s 401(k) plan. You’ll generally have more options in a Roth IRA account with the custodian or your choosing.

Things to consider in deciding upon either Roth option or a different type of retirement account:

• Are your current retirement savings mostly in traditional IRA and 401(k) accounts? Could you benefit from the tax diversification offered by a Roth account?
• Do you expect to be in a higher tax bracket when you retire?
• Will a Roth account be beneficial as part of your estate planning objectives?

A consideration that might sway the choice towards a Roth 401(k) would be if your employer offers a contribution match. Employer matches are essentially free money and unless your 401(k) plan is exceptionally awful it almost always makes sense to contribute at least enough to earn the full company match. One note about matches to a Roth 401(k), by law these matching contributions need to be made to a traditional 401(k) established in your name.

A Roth IRA and/or a Roth 401(k) can be useful accounts in your overall financial and retirement planning. Roth accounts offer tax diversification as far as your retirement savings when you reach retirement age. The trade-off is giving up a current-year tax benefit offered by the ability to contribute to the traditional 401(k) and the traditional IRA (if your circumstances allow for this) in exchange for the ability to take tax-free withdrawals in retirement.

Another advantage of both types of Roth account is that your contributions, but not account earnings, can generally be withdrawn tax and penalty-free. Although it’s typically not a good idea to make withdrawals if your goal is saving for retirement, it’s nice to know that this is an option if your situation changes and you need the money.

FAQs

Bottom line

If you’re wondering whether a Roth 401(k) or a Roth IRA makes the most sense for you, the good news is that though these accounts have their differences, both can be useful components of your retirement plan. This comparison should help you to decide which option is right for you based on your financial situation. A financial advisor might be able to help you decide how to invest money if you still have questions about the best account for you.