The Roth concept
With a traditional IRA or 401k, you contribute money on a pre-tax basis. The value of your contributions is subtracted from your taxable income, so it reduces the tax you pay now. (For example, if your taxable income is $60,000 and you contribute $5,000, your taxable income falls to $55,000, shielding $5,000 from tax in your contribution year.) The money grows tax-deferred until you withdraw it in retirement, when it’s taxed as ordinary income.
The Roth IRA and the Roth 401k, meanwhile, accept only post-tax contributions from you, so you get no tax break up front. (Taxable income of $60,000 and contribution of $5,000? Your taxable income is still $60,000.) But if you follow the rules, you can eventually withdraw the money in the account completely tax-free.
Pros and cons of the Roth 401k and Roth IRA
Here are the main pros and cons of Roth 401ks and Roth IRAs:
| Pros | Cons | |
|---|---|---|
| Roth 401k |
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| Roth IRA |
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It’s worth noting that you might avoid the required withdrawals from a Roth 401k by converting it to a Roth IRA. – action!!
the difference between Roth 401k and Roth IRA
difference between Roth IRA and IRA
| Roth IRA | Traditional IRA | |
|---|---|---|
| Tax benefits | Tax-free1 growth
Tax-free qualified1 withdrawals |
Tax-deferred growth2
Contributions may be tax-deductible3 |
| Eligibility: Age | No age restrictions with employment compensation4 | Must be under age 70½ with employment compensation4 |
| Eligibility: Income | Income limits apply to make contributions | No income limits to make contributions5 |
| Taxation at withdrawal | Contributions are always withdrawn tax-free.
Earnings are federally tax-free after the five-year aging requirement has been satisfied and certain conditions are met.6 |
Pre-tax contributions and any earnings are taxable when withdrawn. |
| Penalties at withdrawal | Non-qualified withdrawals are subject to taxation of earnings and a 10% additional tax unless an exception applies.1 | Withdrawals before 59½ may be subject to a 10% early withdrawal penalty unless an exception applies.2 |
| Minimum required distributions (MRDs) | No minimum required distributions during the lifetime of the original owner | Minimum required distributions starting at 70½ |
| Learn more about Roth IRAs | Learn more about Traditional IRAs |
From Fidelity
