January 21, 2015
What is the difference between a Roth 401(k) and a Roth IRA? What are the contribution limits per type for 2015?
What is the difference between a Roth 401(k) and a Roth IRA? What are the contribution limits per type for 2015?
A Roth 401K is an employer sponsored retirement plan. You take after tax money out of your pay check and your employer sets it in an account to grow, most emplyers will match some of the money that you put in. As of 2015, the limit for annual 401(k) contributions is $18,000 for those under the age of 50. Those ages 50 and older can contribute an additional $6,000 per year. While a Roth IRA also uses after tax money it is separate from your employer and can be done on your own at a place such as Vanguard. They are both great options and should be maxed out whenever you can. The contribution limits are much smaller with Roth IRA accounts. In 2015, the maximum annual contribution is $5,500 for those under the age of 50, while those ages 50 and up can contribute an additional $1,000 per year. Individuals who earn more than $114,000 per year or up to $191,000 for couples cant to contribute to a Roth IRA.
There are a number of differences between a Roth IRA and a Roth 401(k). For the most part a Roth 401(k) is more restrictive than the Roth IRA. The Roth 401(k) is set up by your employer whereas a Roth IRA you would set up on your own or through an investment advisor (preferably on your own to save cost). The biggest difference is that you will likely will not have as many investment choices in your Roth 401(k) as you would in a Roth IRA. This could limit you to having only high fee options available to try and grow your money. In a Roth IRA you can easily invest your money into low cost diversified index funds. Another difference deals with company matching. A Roth 401(k) could have a company match, whereas a Roth IRA would not, since it is not a company sponsored program. One important note regarding this however, is that if a company is allowed to make matching contributions to your Roth 401(k) account, those contributions are not considered “after tax” contributions, but rather the pretax contributions and associated growth are taxed as regular income upon distribution.
Annual contribution limits for 2015 are as follows:
Roth IRA: $5,500 per year and an additional $1,000 catch up if you are over age 50. There are income limitations on this however. High wage earners will see this number reduced as their incomes get larger.
Roth 401(k): $18,000 and an additional $6,000 if you are 50 or over.
Those were wonderful and insightful answers, gentlemen. I have nothing to add. Well done!