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Roth IRA Versus Roth 401(k)/403(b): Which Option Should You Choose?

If your employer offers a Roth 401(k) or 403(b), should you invest via your employer-sponsored plan, contribute to a Roth IRA, or contribute to both? The answer: it depends! The decision will be personal, based on your unique needs and goals.

While both offer a means for you to save for retirement, there are advantages and disadvantages to each option. Here are the key differences you should consider when comparing the two types of Roth options:

Similarities

Feature Roth IRA Roth 401(k)/403(b)
Contributions After-tax After-tax
Earnings Grow tax-free Grow tax-free
Tax-Free Withdrawals
  • The account must be held for at least five years.
  • Distributions can be made in the event of disability, death, first-time home purchase, or upon reaching age 59½
  • The account must be held for at least five years.
  • Distributions can be made in the event of disability, death, or upon reaching age 59½*


Differences 

Feature Roth IRA Roth 401(k)/403(b)
Contributions
Income Restrictions  2021: If your modified adjusted gross income is $206,000 or more for married couples filing jointly or $139,000 or more for single filers, Roth IRA contributions cannot be made No income restrictions
Contribution Limits  2021: $6,000, or $7,000 if age 50 or older 2021: $19,500, or $26,000 if age 50 or older
Employer Contributions/Match No employer contribution Employer may provide a pre-tax match or non-elective contribution
Withdrawals
Required Minimum Distributions (RMDs)  Not required (beneficiaries are required to take RMDs) Required starting with the year in which you reach age 72 or, if later, the year in which you retire. If you are a 5% or greater owner of the business sponsoring the retirement plan, RMDs must begin the year in which you reach age 72**
Loans   Not available If plan offers loans, account holder can borrow up to 50% of account balance or $50,000, whichever is less
Accessibility  Contributions: Accessible at any age without tax or penalty

Earnings: Accessible at any time, but taxable and 10% early distribution penalty may apply if account has not met the tax-free requirements (age 59½ or older, death, disability, first-time home buyer, birth or adoption of child, and account held for minimum of five years)***
If active employee: Must have a distributable event (in-service withdrawal or loan)

If separated from service:
  • Contributions: Same as Roth IRA; however, contributions will likely need to be distributed with earnings (reference plan document)
  • Earnings: Same as Roth IRA; however, the first-time home buyer exception does not apply and birth or adoption of child is an optional provision (please refer to your plan document)
Definition of Five-Year Rule  At least five years after the first day of the calendar year in which you first made a Roth contribution to the retirement plan

Roth IRA distributions are not on a per-IRA basis; once you have met the five-year rule for one Roth IRA, you have met it for all Roth IRAs
At least five years after the first day of the calendar year in which you first made a Roth contribution to the retirement plan

Note that this five-year rule is on a per-Roth-401(k)/403(b) basis
Investments
Investment Options Broader investment options, including stocks, bonds, mutual funds, ETFs, and some option strategies Generally limited to the investment options available in the plan



Determining which account will best suit your needs depends on your current and future financial situation, as well as your specific goals.

Items to Consider:

  • Accessibility: Will you need access to the funds prior to retirement? Roth IRAs offer more accessibility.
  • Required Minimum Distributions (RMDs): If you want to avoid RMDs, you can invest in a Roth IRA or roll over your Roth 401(k) or 403(b) to a Roth IRA when you retire or separate from service.
  • Investments: Do you want greater access to a broader range of investment options? A Roth IRA allows you to invest in exchange traded funds (ETFs), individual stocks, and alternative investments that are likely not offered in your employer’s retirement plan.
  • Income Restrictions: If your income is too high to be able to invest in a Roth IRA, the Roth 401(k) and 403(b) do not have any income restrictions.
There is no right or wrong answer – both options are means for pursuing your retirement savings goals. Take the time to review your options with your Stifel Financial Advisor for more information.

* The 10% penalty is waived on earnings if separated from service in or after the year account holder reaches age 55; however, the earnings withdrawn before age 59½ will be subject to income tax.

** If you reached age 70 ½ in 2019 or prior, your RMDs will begin at 70 ½; however, if you reach age 70 ½ in 2020 or after, you may delay your first RMD until age 72. This is due to the recent enactment of the SECURE Act.

*** The maximum penalty-free withdrawal for birth or adoption is $5,000 per parent.

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