Saving on a Roth 401 (k) might be a better way to do so if taxes on converting a Roth IRA are prohibitive. When comparing a Roth IRA to a Roth 401 (k), each has its own set of advantages and benefits. Neither is intrinsically better than the other. For many, it may at some point help to switch between them to take advantage of the benefits of both.
A Roth IRA allows investors to have much more control over their accounts than a Roth 401 (k). With a Roth IRA, investors can choose from the entire investment universe, including stocks, bonds and individual funds. In a 401 (k) plan, you are limited to the funds offered by your employer's plan. If you don't have enough money to fully pay contributions to both accounts, experts recommend exhausting the Roth 401 (k) first to receive the benefit of a full counterpart from the employer.
However, it's also important to note that if you receive a Roth 401k counterpart from the employer, the matching funds would also go to a traditional 401k. Yes, you can certainly save more money with a Roth 401 (k), but you'll need to make more money to do so. What goes in must also come out, and this is the most powerful advantage you can find in the IRA alternative to a Roth. Based on your plan's investment menu, employees would be better off taking full advantage of their employer's contribution and then funneling extra retirement money into a Roth IRA.
Roth IRAs are also not sponsored by an employer, meaning that there is no counterpart in employee contributions. There are numerous options available: traditional 401k, Roth 401k, traditional IRA, Roth IRA, SEP IRA, SIMPLE IRA. Employers can match their contribution to pre-tax money, and when Roth is funded with after-tax money, the matching funds and their profits will be deposited in a regular 401 (k) account. One of the benefits of a Roth IRA is that the account can basically exist forever without any minimum distribution required.
The main differences between a Roth 401k and a Roth IRA are their different annual contribution limits, their eligibility criteria, and whether or not you will have to accept the required minimum distributions (RMDs). They usually have more to do with the investment vehicle, whether or not you select the Roth option. If possible, you should avoid drawing on your savings, but you can withdraw Roth IRA contributions at any time. In addition, people who want to make large contributions can invest more than three times the amount in a Roth 401 (k) than in a Roth IRA.
If your 401 (k) plan funds exceed 1 percent and you've reached the maximum employer contribution limit, consider investing in a Roth IRA.
