The benefits of a Roth 401K, especially when compared to a Roth IRA, are staggering. This video will help explain what these benefits are and, more importantly, why you may want to consider a 401K of any kind before an IRA. But, you must qualify for the 401K! As part of this video, it should be noted that it was done in later 2012 and reflected 2012 contribution limits vs. 2013 contribution limits. So, we will update this post with 2013 contribution limits. The three primary benefits of a Roth 401K vs. a Roth IRA are:
1) Effective 2013, any employee deferral contribution to a 401K plan by an employee/participant is permitted up to 100% of their income of $17,500 (under the age of 50) and $23,000 (over the age of 50). You heard that correctly. As long as you have income or profits of at least that amount, you can make that as a contribution. Compare that to the maximum IRA contribution limits placed on a Traditional IRA or Roth IRA of $5,500 (under the age of 50) or $6,500 (over the age of 50).
2) 401K plans are not subject to Modified Gross Income (MGI) limitations. Simply stated, you could make $42,000,000 and still contribute up to the $17,500/$23,000 with your 401K and you may be limited to a lower contribution in your IRA. Further, with the provision of profit share within your 401K plan, you can actually have employee and employer contributions made to your retirement plan up to $51,000 (under the age of 50) or $56,500 (over the age of 50). The IRA just doesn’t compete.
3) When you make contribution to an IRA, you are making the contribution to either a Traditional or a Roth IRA. You cannot, for the purposes of this discussion, contribute both pre-tax contributions and after-tax contributions to the same IRA. They are separate animals. With the 401K, if structured correctly through the 401K plan documents, the 401K participant can make contributions in pre-tax, after-tax or a combination of the two…provided, of course, that the annual contribution limit is not exceeded. The contributed funds are further kept within the plan, BUT segregated into separate pre-tax and after-tax “buckets.” Therefore, you should always be able to account for all plan funds…whether pre or after-tax.
Should you self-direct? That is your decision. But, I think you can see that IF you qualify for the 401K and are consistent with your contributions, you will thank yourself in retirement.
As always, the information provided is for educational and discussion purposes and is not, nor should it be interpreted as, any form of tax, legal, financial or investment advice. Always consult your respective professional for assistance.