Roth 401k vs. Regular 401k

January 28th, 2007  |  Published in 401K, IRA, Roth IRA  |  9 Comments

The Roth 401k was made permanent with the passing of the Pension Protection Act of 2006 last year, though it has been around since 2001, and it does for 401k plans what the Roth IRA did for Traditional IRA plans – it created a vehicle for folks to save after-tax dollars and allow it to grow tax free. With a Roth IRA, you contribute after-tax dollars and the earnings and dividends and everything grow tax free – when you begin taking withdrawals from the Roth IRA near retirement, you will not pay any income taxes on them because you’ve already paid for it. With the Roth 401k, you basically operate under the same premise.

There are some huge differences between Roth IRAs and Roth 401ks:

  • The Roth 401k has no income limit! Whereas contribution amounts phase out starting at 99k (for 2007) for Roth IRAs, there is no such limit for Roth 401ks.
  • Since the Roth 401k is a 401k plan, it’s subject to those limits – $15,500 for 2007. So, you can contribute a total of $15,500 to a regular 401k and a Roth 401k total.
  • Roth 401k’s follow the early withdrawal rules of 401k’s, so there are penalties and such. For example, with a Roth IRA, you can withdraw your contributions at any time with no penalty, but not so with Roth 401k’s. You will be penalized if you withdraw your Roth 401k contributions before retirement age.

Lastly, if and when you do leave your job and contemplate rolling over your Roth 401k, it would go to a Roth IRA – just as how a regular 401k rolls into a regular IRA.

  

Responses

  1. » Carnival of Personal Finance #85 @ fivecentnickel.com says:

    January 29th, 2007 at 8:15 am (#)

    […] jim presents Roth 401k vs. Regular 401k posted at My Retirement Blog. […]

  2. finance girl says:

    January 29th, 2007 at 2:28 pm (#)

    This post has been massively helpful to me; I have been trying to figure out the benefit to Roth vs 401k for a year now.

    My husband’s employer began offering a Roth 401k last year which complicated things and we weren’t sure how to take advantage of it (although we have all along both of us been funding our 401ks very consistently).

    And, because we weren’t eligible for a Roth IRA until this last year we never thought about Roth anything.

    I assumed the Roth 401ks were the same limit as the Roth IRAs ($4k).

    I consider myself a halfway educated person wrt personal finance; it I got so confused and befuddled by this, how is the person who doesn’t think much about personal finance ever supposed to figure it out?

  3. retirehappy says:

    January 29th, 2007 at 2:34 pm (#)

    I’m glad!

    It doesn’t matter how educated you are because it’s just a matter of getting all the relevant information in one easy to find place, unfortunately the people writing those information docs aren’t the ones who have to use it so they don’t really think the way “regular” people think.

    The other confusing thing is that Roth 401ks have different rules than Roth IRAs when it comes to withdrawals, which can also be confusing too and a lot of people just assume Roth 401ks are just like Roth IRAs except for 401ks. It’s just not that simple and you wouldn’t know unless you read up on it.

    If you ever have any questions, feel free to email me!

  4. Money Smart Life » Personal Finance Decision Guide - 1st Edition says:

    April 30th, 2007 at 9:18 am (#)

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  5. Damon says:

    May 24th, 2007 at 5:25 pm (#)

    You might want to clarify your third bullet for your readers. Yes you can withdraw your contributions tax free, however, not the entire account. There are qualifiers for taking distributions from your Roth IRA tax free, including: 59 1/2, to beneficiary or estate when die, when disabled, first home expenses.

  6. Jane Donaldson says:

    March 3rd, 2008 at 1:06 am (#)

    Good article, you missed some more advantages of a Roth IRA.

    i) Roth IRA owners can withdraw up to the total value of their contributions at any point in time, without having to pay the 10% early withdrawal penalty or any federal income taxes.

    ii) Upto $10,000 can be withdrawn without any penalty if the owner wishes to purchase a home or principal residence. The home must be purchased by either the Roth IRA owner, his spouse, ancestors or descendants. Also, the Roth IRA owner must not have previously owned a home for atleast 24 months.

    iii) If a Roth IRA owner dies and his spouse also owns a separate Roth IRA, the spouse is permitted to combine the two Roth IRAs into 1 single account without any penalties or fines.

    iv) The Roth IRA does not force distributions upon the owner reaching 70 and 1/2 years of age. This is unlike all tax-deferred retirement plans including the Roth 401k where the owner is required to take minimum required distributions (MRDs) after the age of 70 and 1/2 years. Usually all distributions must be withdrawn by April 1st of the calender year. Source: http://www.401klookup.com

  7. Maha says:

    May 17th, 2010 at 1:32 am (#)

    Hey, I am writing this book about 401(k) plans, and my client told me to write a whole chapter on 401(k) plans’ investment menu quality from an open architecture perspective. Now, I have already been through a few sites, but only managed to get what open architecture is and what an investment menu is.
    I need help, so if you can answer my question and guide me a lil on how to tackle this topic, it would be REALLY super

  8. webmaster a401 says:

    February 6th, 2011 at 11:22 am (#)

    Really Roth 401k is a good retirement savings option.the account eventually becomes tax-free, because the withdrawals taken at retirement are not subject to income tax.
    This tax benefit can only be provided to persons who are at least 59.5 years old, or are disabled, and who have held the account for a minimum period of five years. Roth 401k provides an opportunity to save with a different kind of tax treatment. It is a good option for those who are just starting their careers, and expect their income to grow in the future.

    thanks

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    October 3rd, 2011 at 1:21 pm (#)

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