Roth 401K vs Roth IRA

[youngwildandfree]

Can someone explain this to me like I'm five? What is the advantage of opening a separate Roth IRA account vs just contributing to the Roth 401K account through my husband's employer?

We already max out tax advantaged accounts and our combined income is well under the Roth IRA limit.

[mckaylabaloney]

If you max out tax advantaged accounts, does that mean you're currently maxing out a traditional IRA? If so, I assume you're aware that you can't also contribute to a Roth IRA; you have to choose between one or the other (or split your contributions, though I don't know that there's any real benefit to doing that).

In general, it's better to contribute to traditional 401ks and IRAs when you think your marginal tax rate will be lower in your retirement than what it currently is, and to contribute to Roth 401ks and IRAs when you think your tax rate will be higher in your retirement. Accordingly, it often makes sense to contribute to both a Roth IRA and a Roth 401k for people who expect to pay a higher marginal tax rate in retirement than they currently are paying.

For average situations, AFAIK, the only real benefit of doing a Roth 401k and a traditional IRA, or vice versa, is hedging your bets. In other words: usually it's better to do Roth for both or better to do traditional for both, but if you're not sure which is the case then you can do Roth for one and traditional for the other. Personally, I have a traditional 401k and a Roth IRA, only because I'm over the income limit for deducting traditional IRA contributions. If not for that rule, I'd do traditional for both types of accounts because I currently expect my marginal tax rate to be lower in retirement.

The Bogleheads wiki has a lot more on this: https://www.bogleheads.org/wiki/Traditional_versus_Roth.

[MustacheAndaHalf]

Many employers encourage participation with a company match.  So your husband might contribute 4% of their salary, the the company might match 2% or 4%.  When there's a company match, it's like +50% or +100% for free.  Find out if there's a company match, and make sure to get the entire match.

A Roth 401(k) or any 401(k) will have a higher annual contribution limit.  Currently your husband can contribute up to $19,500 into his 401(k) plan.  With a Roth IRA, the limit is $6,000.  So for your husband, a Roth 401(k) allows more to be saved in a tax advantaged account.

If you don't have an employer yourself, there's no 401(k) plan involved.  But you can still use your combined income, and contribute up to $6,000 per year into a Roth IRA for you.

[Chris @ Saturday Financial]

It depends on the fees. Most of the time, the investments available in a Roth IRA have lower fees than investments available in a Roth 401(k). That's not always the case, but it usually is. And some 401(k)s have additional administrative fees that IRAs at Vanguard or Charles Schwab wouldn't have.

I assume your husband's employer offers Traditional 401(k) deferrals and Roth 401(k) deferrals. If he has maxed out the Traditional deferrals as you mentioned, he actually isn't eligible to make Roth deferrals into the 401(k). The elective deferral limit is a total limit that has to be split between Traditional and Roth as you see fit. But the 6,000 IRA limit is totally separate.

A person under 50 can't contribute any more than $19,500 to a 401(k), but they CAN contribute an additional $6,000 to an IRA.

Hope that helps!

[youngwildandfree]

It depends on the fees. Most of the time, the investments available in a Roth IRA have lower fees than investments available in a Roth 401(k). That's not always the case, but it usually is. And some 401(k)s have additional administrative fees that IRAs at Vanguard or Charles Schwab wouldn't have.

I assume your husband's employer offers Traditional 401(k) deferrals and Roth 401(k) deferrals. If he has maxed out the Traditional deferrals as you mentioned, he actually isn't eligible to make Roth deferrals into the 401(k). The elective deferral limit is a total limit that has to be split between Traditional and Roth as you see fit. But the 6,000 IRA limit is totally separate.

A person under 50 can't contribute any more than $19,500 to a 401(k), but they CAN contribute an additional $6,000 to an IRA.

Hope that helps!

Thanks, I think I understand now. What is confusing me is the plan keeps talking about a maximum of 58K a year, but I'm understanding I should just ignore that number. That's just the federal maximum that the employer needs to keep an eye on for matching/extra contributions. So if he's set to contribute 19.5K pre-tax he cannot use the Roth 401K after-tax option correct?

[youngwildandfree]

Thank you all. I'm getting better at this. :-) Extra details people mentioned/asked about:

- I am employed, but my employer only offers a SEP IRA which I cannot contribute to.
- I have a traditional IRA and I have already contributed 6K for myself.
- He is set to max out his traditional 401K (19.5K).
- He does not have an IRA account of any kind set up.

[Chris @ Saturday Financial]

That's correct! The $58,000 limit is for all deferrals and contributions made by an individual and their employer. It includes elective deferrals and employer contributions such as matching contributions, non-elective contributions, and profit-sharing contributions.

If your husband is less than 50, the limit for HIS 401(k) deferrals/contributions is $19,500.

As mentioned above, the $6,000 IRA limit is separate. You husband can contribute up to $6,000 to a Traditional IRA or a Roth IRA. He could also split the $6,000 between a Traditional and a Roth, if he wanted.

[EvenSteven]

It depends on the fees. Most of the time, the investments available in a Roth IRA have lower fees than investments available in a Roth 401(k). That's not always the case, but it usually is. And some 401(k)s have additional administrative fees that IRAs at Vanguard or Charles Schwab wouldn't have.

I assume your husband's employer offers Traditional 401(k) deferrals and Roth 401(k) deferrals. If he has maxed out the Traditional deferrals as you mentioned, he actually isn't eligible to make Roth deferrals into the 401(k). The elective deferral limit is a total limit that has to be split between Traditional and Roth as you see fit. But the 6,000 IRA limit is totally separate.

A person under 50 can't contribute any more than $19,500 to a 401(k), but they CAN contribute an additional $6,000 to an IRA.

Hope that helps!

Thanks, I think I understand now. What is confusing me is the plan keeps talking about a maximum of 58K a year, but I'm understanding I should just ignore that number. That's just the federal maximum that the employer needs to keep an eye on for matching/extra contributions. So if he's set to contribute 19.5K pre-tax he cannot use the Roth 401K after-tax option correct?

There are 3 types of contributions he can make his 401k.

1) Pre-tax contributions
2) After-tax Roth contributions
3) After-tax non-Roth contributions (this option is dependent on the rules for his particular plan)

1 and 2 share an employee contribution limit of $19,500
1,2, and 3, along with any employer contributions share the $58,000 limit.

3 is generally done only as part of a mega backdoor Roth contribution.