Many options are available today to start up a retirement account. Roth 401k and Roth IRA are the popular retirement investment vehicles that offer similar tax benefits but they are different in many aspects. Potentially, Roth 401(k) is an excellent option amongst the wide range of new plans. Roth 401(k) is the combination of both Traditional 401(k) and Roth IRA retirement accounts. When the Pension Protection Plan was passed in America, Roth 401(k) became more widespread and popular in America.
Roth 401(k):
Through this plan one can get tax-free disbursements after investing in it for at least 5 years and crossing 59½ years of age. It does not have any limitations on income and it utilizes higher contribution limits than the Roth IRA. Individuals below 50 years of age can contribute fully up to $16,500 annually. An additional catch-up provision of $5,500 is provided for individuals over 50 years of age. However it should be noted that these limits are in conjunction with the traditional 401(k) plan.
Roth IRA:
Roth IRA account was created after the establishment of the 1997 Taxpayer Relief Act, which allows an individual to contribute in the after tax funds. The money received during the disbursements at the age of 59½ is tax free. This plan is believed to be the best for individuals with high tax bracket during their retirement. Contribution limit is one of the greatest downfalls of Roth IRA as $5,000 is the maximum yearly limit for individuals below the age of 50 and $6,000 for individuals above the age of 50. Also there are limits to who can contribute to a Roth IRA. And these income limits depend on the status of filing taxes, viz. single or jointly with spouse.
Difference between Roth 401k and Roth IRA accounts are mentioned below in a tabular format:
| Roth IRA | Roth 401(k) |
| Money can be withdrawn at any time, provided that the account has been opened at least five years before such withdrawal. | An age criterion is applicable for withdrawal. It must be withdrawn before the age of 70 and a half |
| Limited annual contributions up to $5000 till 2011 ($6000 in case the age is above 50 years) | Maximum annual contribution limit is $16,500 till 2011 ($22,000 in case the age is above 50 years) |
| Individuals are not eligible if their income exceeds a certain specified limit that is set annually | No restriction on tax bracket and annual income |
Roth 401k offers long term tax benefit and it gives tax free earnings at retirement age. This retirement account is superior over other retirement accounts in the long run.
