Roth 401(k)s certainly have their share of perks.
Not everyone has access to a 401(k) plan through work. And among savers who have the option to contribute to a 401(k), not every employer-sponsored plan has a Roth savings feature.
But if you have a 401(k) plan and it comes with a Roth, then you may want to consider funding it over a Roth IRA, despite both plans working similarly. Here’s why.
1. Higher contribution limits
Roth IRAs used to have a distinct advantage over Roth 401(k)s — they were the only tax-advantaged retirement plan to not impose required minimum distributions (RMDs). But starting in 2024, Roth 401(k)s won’t impose RMDs, either. So that evens the playing field quite a bit.
Meanwhile, the more money you’re able to pump into your retirement account, the more opportunity you’ll have to grow wealth for your senior years. And Roth 401(k)s offer a clear advantage in this regard, since their annual contribution limits are significantly higher than those of Roth IRAs.
Right now, Roth 401(k)s max out at $22,500 for savers under the age of 50 and $30,000 for those 50 and over. And these limits might rise in 2024. By contrast, Roth IRAs max out at $6,500 for savers under 50 and $7,500 for those 50 and over. And while you’re not getting a tax break on the money that goes into a Roth account, you’re getting tax-free gains, so being able to contribute more is a good thing.
2. No income limits
Although Roth IRAs are a wonderful savings tool, higher earners can only go about funding one in a roundabout way — namely, by contributing to a traditional IRA and doing a Roth conversion. The income limits for Roth IRA contributions can change from one year to the next. But this year, you’re barred from making contributions if your adjusted gross income is over $153,000 as a single tax-filer or $218,000 as a joint tax-filer.
Roth 401(k)s, on the other hand, don’t have income limits. You could earn $500,000 a year on your own and still qualify to make direct contributions to one of these accounts.
3. The possibility of an employer match
IRAs are self-managed and self-funded, so every dollar that goes into that plan will generally have to come out of your own earnings. With a Roth 401(k), you may be entitled to free money in the form of an employer match. That’s money you can then invest for additional growth.
In fact, let’s say you’re able to snag a free $3,000 in your Roth 401(k) this year. If you’re 30 years away from retirement and your investments in that account generate an average annual 8% return, which is a bit below the stock market’s average, your $3,000 match will grow into more than $30,000.
It pays to favor a Roth 401(k)
Let’s be clear — there are plenty of benefits to putting your money into a Roth IRA. But now that Roth 401(k)s are going to stop making seniors take RMDs, it pays to consider saving for retirement in one of these accounts instead.
