The most well-known advantage of the Roth account is its tax-free withdrawals. All withdrawals from a Roth account are tax-free if the participant is at least 59 ½ years old and the account has been held for five years. This can be an advantage for those who expect to be in a higher tax bracket at the time of withdrawal, those who expect that tax rates may be higher in the future, and those who want to prepay the tax liability on their retirement accounts.
Within the Roth type there are several different options- the Roth IRA, for example, and the Roth 401k. In deciding between the two, it is important to compare the requirements and features of each.
The contribution limits for the Roth IRA are $5,500 for those under the age of 50 or $6,500 for those age 50 and above in 2013.
Required minimum distributions (RMD) are not required for the Roth IRA. The participant is not required to take mandatory withdrawals from the account. He or she can withdraw as much or as little from the account during retirement. The participant can opt to not withdraw at all, leaving the fund to grow without interruption. He or she can also choose to leave the full amount to beneficiaries, tax-free.
The Roth IRA has unlimited investment options, allowing for greater potential for diversification.
The Roth IRA has income limits on who can make contributions to the account. If the income is higher than the limit, the participant can maintain but not contribute the maximum amount to the fund. Contributions to the plan begin to be phased out at $112,000 Modified Adjusted Gross Income (MAGI) for single filers and $178,000 MAGI for joint filers. Contributions are phased out at $127,000 and $188,000 MAGI, respectively
The Roth IRA gives an annulment option which allows Roth conversions to be reversed in part or in total. Conversion to Roth IRA can take place once the participant leaves the company and is 59 ½.
It is easier to get contributions back from the Roth IRA account, tax-free. Direct contributions to the account can be withdrawn at any time without tax penalty. Rollover amounts can be withdrawn after the account has been held for five years, and earnings can be withdrawn after age 59 ½ and the five year holding period.
The Roth 401k has significantly higher contribution limits than the Roth IRA. In 2013, the contribution limits are $17,500 for those under age 50 and $23,000 for those age 50 and above.
There are required minimum distributions (RMD) beginning at age 70 ½ with a Roth 401k. Participants who are 70 ½ and still employed at the company holding the Roth 401k do not have to begin taking distributions from the plan. RMD would begin however, once retirement from the company has taken place.
The Roth 401k has a more limited investment menu. Investment options can be limited to what the plan administrator offers.
The plan does not have income limits on who can make contributions. The maximum contribution amount can be made regardless of income.
Conversion to a Roth 401k is available at any time and at any age. It is not restricted to a certain age. Young workers, for example, can convert to a Roth 401k. All or part of a traditional 401k can be converted to a Roth 401k. There is no annulment option for a Roth 401k conversion.
The Roth 401k tends to offer greater creditor protection. As an employer sponsored plan, the Roth 401k usually offers more protection against lawsuits and bankruptcy creditors.
The Roth 401k may have a loan feature, depending on the plan sponsor.
Both the Roth IRA and the Roth 401k offer different advantages and features. The best choice for you depends on your retirement circumstances and goals.