The 401k and 403(b) experts at Nesa Plan Consultants regularly receive questions from plan sponsors, financial advisors, CPAs, and other industry professionals on broad array of topics related to retirement plans. A recent question came from a HR Director at a medium size employer about the main difference between Roth IRA and Roth 401k.
Roth after-tax contribution was born more than a decade ago in 2005 and it remains a complex topic. We hope the outline below will provide some clarity when it comes to the differences between Roth IRA and Roth 401(k) Designated Account. Let’s get some big differences out of the way. One is contribution amount – an individual can contribute $19,000 ($25,000 for age 50 or older) in 2019 to a Roth 401(k), but he can contribute only $6,000 ($7,000 if age 50 or older) into a Roth IRA. Another difference is compensation limit – Roth IRA limits the amount of contribution you can make depending on your income level, but you can make contributions to a 401(k) regardless whether you make $50,000 or $1,000,000.
Roth IRA vs. Roth 401(k) Designated Account
Characteristics | Roth IRA | Roth Account |
Participation |
Anyone with earned income under compensation limit | Anyone who is a participant in a 401(k), 403(b) or 457 plan that permits Roth contributions. There’s no income limit to make contributions |
Contribution Limits | IRA Annual limit. $6,000 for 2019 ($7,000 if age 50 or older) | Deferral limit – same as 401(k) deferral. $19,000 for 2019 ($25,000 if age 50 or older) |
Minimum distributions | Only after death of participant | Yes – required. Starts at age 70-1/2 |
Requirements for qualified distribution | 5 years & on account of death, disability, age 59 ½ or first time home purchase (up to $10,000) | 5 years & on account of death, disability or age 59½ |
Tax for nonqualified distributions | Nonqualified distributions are distributed in order: contributions (basis), conversions (basis), then earnings (taxable) | Nonqualified distributions are prorated between Roth contributions (basis) and earnings (taxable) |
Rollovers | Permitted from qualified plan or traditional IRA. Must include rollover amount into income. |
In-plan Roth rollovers permitted |
Recharacterization Permitted | Yes – permitted* (limited by 2017 TCJA) | No – not permitted. Once the rollover takes place, it cannot be undone. |
Source: Dalton, James F., and Michael Dalton. Retirement Planning and Employee Benefits. Money Education (Me), 2019. | ||
Have questions? We would love to hear them. Our 401k and 403b experts will have an answer for you within 48 hours. Send us an e-mail at mrahman@nesa401k.com or give us a call at 818-275-1556.
A 12-year veteran in all aspects of workplace retirement plan benefits program, Mizan J. Rahman specializes in the compliance, administration, design, and legal documentation of 401(k), 403(b), and 457(b) plans. Mizan provides high-level, personalized consulting to small and medium-sized businesses and not-for-profit organizations. One of the select few to have been awarded Enrolled Retirement Plan Agent (“ERPA”) by the Internal Revenue Service, Mizan regularly represents clients in front of DOL and IRS during audits.
