Roth 401(k)s and Roth IRAs have many similarities, both allow you to make contributions after tax with the intent to collect tax free earnings in the future.
For people under age 50, there is a maximum contribution to a Roth IRA of $5,500 for 2017 ($6,500 for those 50 and older). In the case of a Roth 401(k), you can defer $18,000 for those under 50, and $24,000 for those age 50 and older in 2017.
A Roth 401(k) has no income limit to contribute, but that is not the case for a Roth IRA. If your annual income is greater than $118,000 (or $186,000 for a married couple filing jointly), your ability to contribute will be limited. An advantage of the Roth IRA is that it has no RMDs, or Required Minimum Distributions. In the case of a Roth 401(k), you must start to take RMDs when you are 70 and ½ years of age. The funds from a Roth 401(k) can be rolled into a Roth IRA, but this cannot be done in reverse. A Roth IRA may not be rolled into a Roth 401(k)
Roth IRAs have preferable rules concerning qualified distributions when compared to a Roth 401(k). For example, you may take a qualified distribution for the purchase of your first home, something you cannot do with a Roth 401(k).
As you can see, Roth 401(k)s have some clear advantages in making contributions, but Roth IRAs are more favorable in terms of taking distributions and avoiding RMDs. When weighing the options of either plan, you would be well served by consulting any of our qualified financial experts.
*A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 1/2 or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.