Uncovering the Secrets – Roth IRA vs. Roth 401k

At REAP Financial, an Austin-based financial & retirement planner, we always talk about the importance of tax-free investing. You can get tax-free investing through two retirement accounts, Roth 401ks and Roth IRAs. While both of these accounts are vehicles for tax-free investing, there are some key differences between the two you need to be aware of. In this article, we’ll break down the top differences between a Roth IRA and a Roth 401k. 

Some of the best accounts to have in your retirement portfolio are the Roth 401k and the Roth IRA. However, to maximize the ability to grow your portfolio tax-free, you need to be very familiar with the differences between these accounts. Keep reading to uncover the differences between these two account types!


1. Contribution Limits

Obviously, you have to have earned income to contribute to either of these accounts. Assuming you have earned income and can contribute to these accounts, there are different contribution limits for what you can put towards a Roth IRA and a Roth 401k. For those under 50, you can now contribute $7,000 per year to a Roth IRA, per the 2024 regulations. If you have a Roth 401k, you can contribute up to $23,000. If you’re over 50, you can contribute $8,000 per year to a Roth IRA. If you have a Roth 401, you can contribute up to $30,500, including the catch-up provision.

People with access to both account types often ask if they can put money in both. The answer for most people is yes. However, if you are a high-income earner, you may not have access to a Roth IRA. If you’re a single tax-filer and you make over $161,000, you can’t put money in a Roth IRA. If you’re married and you make over $240,000 combined income, you will also be phased out and no longer be able to put money in a Roth IRA. 

However, you can continue to put money in your Roth 401k, regardless of your income level. If you are under those high-earning levels, you can contribute to both. If you’re over the income limits, but you still want to contribute to a Roth IRA, you can explore doing a backdoor Roth IRA conversion. We have covered this strategy on REAP Financial resources before; head over to our YouTube channel for more information. If you do want to execute a backdoor Roth IRA conversion, make sure you consult with a licensed CPA. 

2. Roth 401k Investing Options Limited

Another main difference between a Roth IRA and a Roth 401k is how you are able to invest it. Typically, your Roth 401k is only able to be invested in the mutual funds that the plan provider offers. Oftentimes, the size of your employer determines your options, with larger employers providing a greater number and more affordable options. If you have a smaller employer, you may have more limited or expensive options. That’s a reason many people consider moving their 401k’s around, if they have multiple 401k accounts. If you’re invested in a Roth IRA, in most cases you can invest in a wide array of things, such as stocks, mutual funds, exchange traded funds, real estate, gold, and more. 

Sometimes, we see clients that have a 401k at a former employer where they no longer work. These clients often do 401k rollovers, moving their 401k dollars into a Roth IRA or traditional IRA to get better, more diverse investment options.

3. Ability to Borrow

One more difference between the two accounts is the ability to borrow against the balance. Sometimes, people want to borrow money from their 401k during their working career. Most companies will allow 401k loans, so you can borrow from it and pay it back over time through payroll deductions. You cannot take loans on a Roth IRA. Unfortunately, that’s a hard and fast rule; no exceptions.

4. Required Minimum Distributions 

One of the things that makes Roth accounts so powerful is their lack of required minimum distributions (RMDs). There are no required minimum distributions on Roth IRAs or Roth 401k. Prior to 2024, if you were of RMD age, you had to take RMDs on your Roth 401k. However, now in 2024, you no longer are subject to RMD on your Roth 401k, meaning both Roth accounts are free of required minimum distributions.

Roth accounts are a great tool to accumulate wealth, distribute wealth tax-free in retirement, and leave wealth to your heirs tax-free, all without required minimum distributions. This gives you much more control over your tax bracket in retirement, so you can have even more power over your wealth. 

Understanding All the Benefits of Roth Accounts 

If you’re interested in more information like this, check out our free resource, The Roth Decision: 12 Reasons Why You Should “Go Roth.” To get your hands on this Roth guide, simply send an email to retire@reapfinancial.com to request your free copy. It is up-to-date with 2024 information and all the latest strategies, so you’re ahead of the Roth curve!

Financial & Retirement Planning for Austin, Texas Retirees

If you’re in the Austin, Texas area and seeking a skilled retirement planner, consider reaching out to our expert team at REAP Financial. We specialize in crafting personalized retirement strategies tailored to your unique financial goals and lifestyle aspirations. Let us help you navigate the intricacies of retirement & financial planning to ensure a secure and fulfilling future for you and your loved ones. Contact us today for a consultation and start your journey toward a peaceful retirement in Austin.

Phone: (512) 249-7300

Our Main Office Address in Austin

REAP Financial

9414 Anderson Mill Rd #100

Austin, TX 78729


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