Roth 401k vs. Roth IRA: Which Is Best for You?

Most of us need to save a significant sum for our retirements, and tax-advantaged retirement plans can help us do so. Roth accounts are especially appealing since they offer the opportunity to eventually withdraw money from them tax-free. Roth accounts come in several forms; let's review the Roth 401k vs. the Roth IRA to see which is best for you.

The needAccording to the 2014 Retirement Confidence Survey, 60% of American workers have less than $25,000 saved for retirement (excluding the value of their home), and 36% of American workers have less than $1,000 saved. 401ks and IRAs can go a long way toward remedying that worrisome situation.

The Roth conceptWith a traditional IRA or 401k, you contribute money on a pre-tax basis. The value of your contributions is subtracted from your taxable income, so it reduces the tax you pay now. (For example, if your taxable income is $60,000 and you contribute $5,000, your taxable income falls to $55,000, shielding $5,000 from tax in your contribution year.) The money grows tax-deferred until you withdraw it in retirement, when it's taxed as ordinary income.

The Roth IRA and the Roth 401k, meanwhile, accept only post-tax contributions from you, so you get no tax break up front. (Taxable income of $60,000 and contribution of $5,000? Your taxable income is still $60,000.) But if you follow the rules, you can eventually withdraw the money in the account completely tax-free.

There's an extra twistfor the Roth 401k, though: If the employer makes matching contributions, those are considered to have been made with pre-tax, not post-tax, dollars. They typically go into a separate account and receive the same tax treatment as a traditional 401k account.

Pros and cons of the Roth 401k and Roth IRAHere are the main pros and cons of Roth 401ks and Roth IRAs:

It's worth noting that you might avoid the required withdrawals from a Roth 401k by convertingit to a Roth IRA.

The Roth 401k and Roth IRA can help you achieve a wonderful retirement. Source: Frank Kovalcheck, Flickr.

What to doThe choice for you might be clear already. If your workplace doesn't offer a Roth version of its 401k yet, then that's out of the question. (Not all companies with 401ks offer Roth 401ks, but they're becoming more common, so ask your benefits department about it.)

You don't even have to choose between the two options -- you can make use of both! Participate in your workplace's 401k, Roth or not, and also contribute to a Roth IRA. If you only have a few dollars to contribute, though, a Roth IRA offers more flexibility and investment options. (Try not to leave any employer matching funds on the table, though -- contribute enough to your 401k to max that out, as it's free money.)

One good strategy if you can't max out both contribution limits is to contribute enough to the 401k to get all available matching dollars, then max out your IRA if possible, and then contribute any additional available investment money through your 401k.

However you go about it, be sure you're growing a nest egg large enough to give you a comfortable retirement.

The article Roth 401k vs. Roth IRA: Which Is Best for You? originally appeared on

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