How To Choose Between Traditional And Roth 401k

2019/10/15

Roth IRA and Roth 401(k) differences are notable though they appear to be similar. Contributions to both are made after taxes and the earnings can be taken out tax free after 5 years or after attaining age of 59½.

High contribution limit is the most remarkable characteristic of 401(k)s, be it traditional or Roth. An employee can deposit a maximum of $16,500 per year. The employees aged over 50 years of age are allowed to deposit up to $22,000 per year.

Permissible maximum contribution to any 401(k) is nearly three times more than that of an IRA. Maximum permissible contribution to IRA per year is $5,000 for an employee below 50 and $6,000 for those above it.

Roth IRA account exists forever and there is no compulsion to distribute a minimum amount from it at regular interval. As such, Roth IRA may be passed to next generation for providing them tax free earnings. On the other hand, Roth 401(k) needs to be distributed from the age of 70½. If there is a need of this money then such distribution is helpful. However, there is another way to keep the savings working and earn tax free income. Rolling a 401(k) directly to a Roth IRA does the trick.

A certain percentage of worker’s contribution can be matched by the employer in 401(k)s. When an employee is contributing in Roth 401(k) matching amount from the employer is treated as a traditional 401(k) because it goes pretax. As such, every Roth 401(k) has a traditional component. Workers dividing their contributions between a traditional 401(k) and Roth 401(k) may find matching contribution of employers in the traditional 401(k). This is not available with Roth IRA.

Investing in Roth IRA provides an investor with more investment options than that available with a 401(k). An investor can choose from stocks and bonds for the Roth IRA account. With 401(k), the options are limited to the funds offered by the employer. Matching the contribution of employer in 401(k) and funneling extra savings in Roth IRA account may be a sensible choice.

Conversion from traditional IRA to Roth IRA is now allowed for high earners but they are not allowed to make any contribution. There is no such restriction for Roth 401(k).

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