Saving in a Roth 401 (k) could be a better path if taxes for a Roth IRA conversion are unaffordable. When comparing a Roth IRA to a Roth 401 (k), each has its own perks and benefits. No one is inherently better than the other. For many, it may help you at some point to switch between them to reap the benefits of both.
A Roth IRA gives investors much more control over their accounts than a Roth 401 (k). With a Roth IRA, investors can choose from the entire investment universe, including individual stocks, bonds, and funds. In a 401 (k) plan, they are limited to the funds that their employer plan offers. The biggest differences between a Roth 401k and a Roth IRA are the different annual contribution limits, eligibility criteria, and whether or not you must claim the required minimum distributions (RMDs).
Even if your company’s plan offers access to investment funds with lower expense ratios, all company retirement plans must cover operating costs that IRAs don’t include. Yes, you can certainly save more money with a Roth 401 (k), but you’ll need to make more money to do that. However, if you initiate a Roth IRA rollover, you have 60 days to use that money at a 0% interest rate before you deposit it into your new account, essentially a short-term loan. With a Roth IRA, you can withdraw an amount equal to the contributions you make at any time, with no penalties or taxes.
However, this does not apply to the earnings of a Roth IRA, for which withdrawals before retirement (if you are under 59½ years of age) are still subject to a 10% penalty. For employees who divide contributions between a regular 401 (k) and a Roth 401 (k), the company contribution is applied to the traditional 401 (k). With a Roth 401k, you’re limited to the investment options that your employer’s 401k plan offers, and that’s just three. However, it’s also important to note that when you receive a Roth 401k match from the employer, the corresponding amount also goes into a traditional 401k amount.
Otherwise, you would usually have to take out a loan from the Roth 401 (k) to access your 401 (k) funds tax-free, if the plan allows it. What goes in must also come out, and here is the biggest advantage you can find in the IRA alternative for a Roth. If the funds in your 401 (k) plan are more than 1 percent and you’ve maxed out all employer quotas, you should urgently consider investing in a Roth IRA. Those who want more flexibility with their funds, including the fact that no distributions are required, could opt for a Roth IRA.
Even if your company offers a Roth option in their 401 (k) plan, you might still prefer the Roth IRA because it offers greater flexibility and customization.
