A Roth IRA account is an individual’s personal retirement account that allows them to set aside after tax income up to a specified amount per year. The earning on the account as well as the withdrawals after age 59 ½ are tax free. The Roth 401 (k) combines the features of a traditional 401 (k) with features of a Roth IRA. Both of these retirement plans allows for the individual to contribute to the account without any up front tax deductions. As long as the account was held for more than five years withdraws are not subject to income tax after the normal retirement age.
Income limitations
If the taxpayer has an income above a certain level, Roth IRA is not available to them. If they are single, the contribution limit is completely eliminated at $120,000. If the taxpayer is married, the joint contribution limited is eliminated when income is above $176.000. Due to the income cut off level, many tax payers are not able to take advantage of the tax free retirement saving the Roth IRA offers. The Roth 401 (k) retirement account allows the tax payers to contribute no matter what their income level may be. There is no limit that applies to this account. As long as the employer offers Roth accounts, and the employee is eligible for the 401 (k) programs, they are eligible to participate.
Contribution limits
Individuals are able to contribute money into their Roth IRA account January of the present tax year through April 15 of the succeeding tax year. If the individual is under 50 years of age, they are allowed to contribute there post tax dollars into their Roth IRA with a limit of $5,000. If the individual has multiple providers, they may contribute part to one provider and the rest to the other, but the maximum that can be provide is still $5,000. If the individual is over the age of 50, $5000 is still their limit, but, they are allowed to contribute an added $1000 which is called catch up contributions. This arrangement allows assistance for individuals who are behind on their retirement savings.
The contributions that can be mad to the Roth 401 (k) plan are identical to the original 401 (k) plan. Individuals under the age of 50 are allowed to contribute a maximum amount of $16,500 into their account. If the individual is above the age of 50 years of age, they are allowed to contribute up to $22,000. This figure includes the $5,000 allowed for catch up contributions. In addition to the Roth 401 (k) plan, standard Roth IRA contributions can be made.
Employer matching
The disadvantage of a Roth IRA compared to a Roth 401 (k) account is the employer contributions. In a Roth 401 (k) plan, the employer can choose to match 100% of the employee’s contribution, or just a specified amount such as 50 cent for every dollar the employee contributes to the account. However, the employers contribution is pre-taxed, therefore, it does not go into the Roth 401 (k) account; it is contributed into a traditional 401 (k) account.
Investments
In a Roth IRA account investment options are infinite. Most employers allow the employee to have control over their own account. The individual can invest in options such as stocks mutual funds, bonds, exchange funds or treasury securities. They can even invest in options such as real estate. The Roth 401 (k) is more like the traditional plan where as it has to select form the investments their employer offers. Most choices may come from a high quality mutual fund. Employers can also offer items such as a stable value fund that Roth IRA plans would not offer. One thing to avoid is putting too much of one company’s stock in a Roth 401 (k). It may not be a good idea to put more than 10% of an individual’s retirement savings into a single account.
Access to accounts
Although the money in either Roth IRA or Roth 401 (k) should be left untouched until retirement, a Roth IRA does allow an individual to withdraw from it at any time, however, tax benefits are forfeited and there may also be an early distribution penalty. A Roth 401 (k) does not allow an employee to withdraw from it while employed with that company, however, it does allow borrowing from the account in some situations. An individual is allowed to borrow up to 50% of the amount in the account only up to $50,000. The loan taken from a Roth 401 (k) account must be repaid within five years. Some plans do not allow an individual to make contributions to the account until the loan is repaid.
Reference page
Buckley, John E., Economist, Division of Compensation Data Analysis, Planning, and Bureau of Labor Statistics. "401khelpcenter.com - Comparisons of Roth 401k, Roth IRA, and Traditional 401k Retirement Plans." 401khelpcenter.com - 401(k) and 403(b) Plan Sponsors, Small Business, Employee Retirement Plans. N.p., n.d. Web. 25 Apr. 2011. <http://www.401khelpcenter.com/
"Roth IRA vs. Employer Plan." Fairmark.com. N.p., n.d. Web. 25 Apr. 2011. <http://www.fairmark.com/rothira/rothvemp.htm>. Smith, Alibaster. "The Rules for Borrowing From a Roth 401(k) | eHow.com." eHow | How to Videos, Articles & More - Trusted Advice for the Curious Life | eHow.com. N.p., n.d. Web. 25 Apr. 2011. <http://www.ehow.com/info_7778627_rules-borrowing-roth-401k.html>.
Steiner, Sheyna. "5 differences between a Roth IRA and a Roth 401k." Mortgage Rates Credit Cards Refinance Home CD Rates by Bankrate.com. N.p., n.d. Web. 25 Apr. 2011. <http://www.bankrate.com/finance/retirement/roth-ira-401-k-what-s-the-difference.aspx>. • Thomas, Kaye A.. "Roth 401k or 403b Compared with Roth IRA." Fairmark.com. N.p., n.d. Web. 25 Apr. 2011. <http://www.fairmark.com/rothira/roth401k/compare-ira.htm>.
