Which Is Best: A Roth IRA or Roth 401(k)?

The good news is more employers are offering a Roth 401(k) as part of their retirement plans. The bad news is this is giving people more choices, and sometimes too many choices can lead us to do nothing. In reality, having more choices and options should make it easier to maximize your retirement planning funds. Which option is right for you ultimately depends on your goals, time frames and perhaps even your retirement plan options.

I will share with you a few questions you should ask yourself to help you make the choice between a Roth IRA and a Roth 401(k). Before that, I just wanted to cover the basics of a Roth. You won’t get a tax deduction for making contributions like you would with a traditional IRA or 401(k). On the other hand, you won’t have to pay taxes when you make withdrawals from a Roth account assuming you’ve held the funds for five years and are wiser than 59 1/2. Lastly, the amount you can contribute phases out when your income reaches $118,000 for singles and $186,000 for married couples. (For more, see: An Introduction to the Roth 401(k).)

Now that the basics are out of the way, assuming you want to have a Roth as part of your retirement plan, here are a few things to think about when choosing between a Roth IRA and a Roth 401(k).

How Much Can You Contribute to a Roth IRA?

More importantly, how much do you want to save for retirement per calendar year? For a Roth IRA you can only contribute $5,500 per year, whereas the Roth 401(k) has much higher contribution limits allowing $18,000 per year. These numbers are slightly higher for those 50 or older who are eligible to make catch-up contributions - $1,000 extra is allowed for Roth IRAs and a Roth 401(k) allows an additional $6,000 catch-up contribution.

In general, the more you want to save the more likely you will lean towards the Roth 401(K).

Are You Eligible for an Employer Match Contribution in Your 401(k)?

An employer match is like free money from your boss. Matching contributions will be credited to a regular 401(k), not the Roth portion, but all the same they still help you move closer to being financial independent. You won’t owe taxes now, but you will be taxed on the employer matching contributions and earnings when you withdraw them. They also need to be kept in the account until you are 59 1/2 to avoid IRS penalties.

If you have access to an employer match, you should at the very least contribute enough to get the full match to the employer plan. The money is just sitting there for you to claim it. There are no employer matching contributions on regular Roth IRAs, just in case anyone wanted to know. (For more, see: A Closer Look At the Roth 401(k).)

Investment Options Available for Roth 401(k)

I know many people don’t always love the investment choices within their 401(k) plans. This is where people often lean towards setting up their own Roth IRA. If you hate the investment options in your Roth 401(k), perhaps fully fund a Roth IRA at $5,500. But still make sure to put enough into your Roth 401(k) to get the full employer match. If you still want to save more, use the Roth 401(k) higher contribution limits to keep saving once you’ve maxed out the regular Roth IRA.

Which Option Are You More Likely to Fund Appropriately?

Whichever account you are using, make sure set up automatic contributions. For a Roth IRA, put away money monthly on an automatic basis right out of your bank account. For the Roth 401(k), contributions will be payroll deducted. Which option are you more likely to stick with? This isn’t rocket science, but it is easier to put a little money away each month (or every paycheck) versus coming up with a year of contributions at tax time.

Required Minimum Distributions for Roth 401(k)s and Roth IRAs

At some point in the future the wonderful government may force you take to take required minimum distributions (RMDs) once you turn 70 1/2 years old. These rules do not apply to Roth IRAs, and this has led many people to mistakenly believe that that same rules apply to a Roth 401(k). Don’t be fooled, required minimum distributions are required from Roth 401(k) assets. Of course if you are no longer working for an employer you can roll over your Roth 401(k) to a Roth IRA (discuss the pros and cons with your fiduciary financial planner) and no longer be forced to take RMDs. 

For younger workers, this RMD probably won’t change your ultimate decision much. On the other hand, if you are closer to retirement this may alter your choice between a Roth 401(k) and a Roth IRA. Side note on RMDs for those still working in your 70s - if you are still working for the employer on the 401(k) plan past 70 1/2  you are not required to take RMDs from that 401(k) plan. This does not apply to outside traditional IRAs or old 401(k) plans. This rule would also allow you to avoid RMDs from your Roth 401(k).

The Bottom Line

Ultimately, this choice will boil down you to your preferences and specific financial needs. It may even be a combination of both a Roth IRA and Roth 401(k), with a little employer match thrown in. Depending on your income you can potentially have both types of accounts in a year, further increasing your contribution limits. Sit down with a fiduciary financial planner to make sure you are maximizing your retirement savings and staying on track for financial independence. (For more from this author, see: How to Make the Most of Your RMDs.)


The opinions voiced in this article are for general information only. To qualify for the tax free penalty free withdrawal of earnings, a ROTH IRA must be in place for at least 5 tax years, and the distributions must take place after age 59 ½ or due to death or disability. Before taking any specific action, but sure to consult with you tax professional.