A Tale of Two Roths

A Tale of Two Roths

August 09, 2021

This is an updated version of an article originally published in 2021.

Most people are aware of the tax-free benefits of the Roth IRA.

But what many people may not know is that their company retirement plan probably offers a Roth option as well--the Roth 401(k). The 401(k) version allows highly paid employees to contribute to a Roth account, and all plan participants can contribute more to a Roth 401(k) than they can to a Roth IRA.  (Note: Roth options are also available in 403(b) and 457(b) plans, and the features and rules discussed in this article apply to those plans as well.) 


The Roth 401(k) offers most of the same features and benefits of the Roth IRA.  Contributions are made on an after-tax basis. Earnings grow tax-free, and withdrawals made after age 59½ are tax free as well.  (Both Roth IRAs and Roth 401(k)s require you to own these accounts for five years before you can enjoy these tax-free benefits.)

But there are important differences.

Income eligibility and restrictions

First, investors can only make contributions to a Roth IRA if their modified adjusted gross income (MAGI) is below a certain level (see the chart below). And, in 2024, annual IRA contributions are capped at $7,000 per year plus an additional $1,000 in “catch-up” contributions for those over age 50. 

The restrictions are much looser for Roth 401(k)s. All retirement plan participants, regardless of income, can make both pre-tax contributions to their regular 401(k) account and after-tax contributions to their Roth 401(k) account, up to a maximum combined total of $23,000 per year, plus up to $7,500 in additional “catch-up” contributions in 2024.

One key rule that the SECURE Act 2.0 has changed regarding the Roth 401(k): Starting in 2025, employees over 50 who receive more than $145,000 per year in salaries can only make after-tax catch-up contributions to a Roth 401(k) account. Pre-tax catch-up contributions will no longer be allowed. 

Matching contributions

Employers can match Roth 401(k) contributions, although these matches must be made to a pre-tax account (which means these contributions and any earnings will be taxable when withdrawn).

Distribution requirements

Roth IRAs don't require you to start taking Required Minimum Distributions (RMDs) at age 73. Until 2023, RMDs were mandatory for Roth 401(k) accounts, but, thanks to the SECURE Act 2.0, annual distributions from Roth 401(k) accounts are no longer required, even if you were taking them in previous years. 

Distributions made to beneficiaries after the death of the account holder are tax-free as well. However, if the account owner died in 2020 or later, non-spouse beneficiaries have to "empty out" the account within 10 years of the owner's death. 

Investment options

If you’ve established your Roth IRA as a brokerage account you’ll be able to invest in stocks, bonds, ETFs and possibly thousands of mutual funds, including lower-cost index funds. With a Roth 401(k), your investment options will be limited to those available in the plan, and investment expenses may or may not be higher.

Below is a chart that summarizes the main differences between the two Roth options. (Note dollar figures are for 2024)


So…which one is best?

That’s a trick question, because the answer really depends on your situation.

 A Roth IRA may be a better choice if: 

  • Your MAGI level allows you to make Roth IRA contributions.
  • You want to have access to the widest variety of investment options.
  • Controlling investment expenses is a priority.

 A Roth 401(k) may be a better choice if: 

  • Your MAGI is too high to allow you to make Roth IRA contributions.
  • You want to contribute more than $7,000 each year to your Roth account.
  • You want to maximize employer matching contributions for both your pre-tax and Roth 401(k) contributions.
  • You want your contributions withdrawn automatically from your paycheck.

Either option has its pros and cons, which is why you may want to meet with a financial advisor to figure out which one might be an appropriate choice, given your situation. 

How about contributing to both? 

If your MAGI qualifies you to make Roth IRA contributions, consider contributing to both a Roth IRA and Roth 401(k). You could make the maximum annual after-tax contribution to your Roth IRA, and then make additional after-tax contributions to your Roth 401(k). If you only make after-tax Roth contributions in 2021 you could put away a combined total of $30,000 ($38,500 if you can also maximize "catch-up" contributions).

With this approach, you could choose to pass on all of your Roth IRA assets to your spouse or heirs tax-free, and then use your Roth 401(k) assets to provide tax-free income during retirement.

Get professional help

Of course, these decisions are not always clear cut. Your age, your tax situation, your retirement income needs and your estate planning priorities should influence which Roth option makes more sense—or if you might be better off contributing more to your pre-tax 401(k) plan account. That’s why you may want to work with a financial advisor to evaluate all of your retirement savings options.

This material has been provided for general informational purposes only and does not constitute either tax or investment advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax professional and/or a financial advisor. 


This article was authored by David Jaeger and Jeffrey Briskin. David is a financial advisor located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or djaeger@canbyfinancial.com. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.


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