Sarah Brenner, JD
You may have heard about the increasing availability of Roth options in 401(k) plans. You may be wondering about the differences between a Roth IRA and a Roth 401(k) and which one is best for you. While both accounts offer the ability to make after-tax contributions in exchange for tax-free earnings down the road, there are some significant differences to consider.
One key difference is the contribution limits. For 2023, Roth IRA contributions are limited to a maximum of $6,500 for those under age 50 and $7,500 for those 50 or older. Roth 401(k)s offer much higher limits, allowing you to defer $22,500 in 2023 or $30,000 if you are 50 or over.
Another significant difference is income limits. Roth 401(k)s have no income limits on contributions, so high earners can still make deferrals. However, Roth IRAs do have income limits, and in 2023, your ability to contribute will begin to phase out when your income exceeds $138,000 ($218,000 if you are married and filing jointly). If you fall into this category and still want to fund a Roth IRA, you may want to consider the backdoor Roth IRA strategy as a way around these limits.
When it comes to required minimum distributions (RMDs), Roth IRAs have always had the advantage of no RMDs during your lifetime, while Roth 401(k)s have RMDs. However, the new SECURE 2.0 law passed last year will change that starting in 2024. You will no longer need to take RMDs from your Roth 401(k) during your lifetime. Eligible designated beneficiaries of your Roth IRA or Roth 401(k) will be subject to RMD requirements. However, most non-spouse beneficiaries of these accounts will be subject to a 10-year payout period under the SECURE Act.
There are also differences in rollovers and qualified distributions. While Roth 401(k) funds can be rolled over to a Roth IRA, the opposite is not true. Additionally, the rules for qualified distributions from Roth IRAs are more favorable than those for Roth 401(k)s, allowing for a wider range of scenarios in which you can take tax-free distributions.
Choosing a Roth IRA and a Roth 401(k) is not an all-or-nothing decision. If you are eligible for both accounts, you can contribute to both. If you have a question about which option is the best fit for you, call Chris Robinson at RFG Wealth Advisory in Argyle. Our number is 940-464-4104, or you can schedule a 15-minute, no-obligation call with us at RFGWealthAdvisory.com. We are here to help.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through RFG Wealth Advisory, a registered investment advisor. RFG Wealth Advisory and RFG Wealth Management are separate entities from LPL Financial.