401 (k) and Roth IRA have so many similarities, yet they are different as well. Both are Roth plans, the reason being, 401 (k) is an employer retirement plan. Roth IRA is a self-distributed account. Let us discuss them as to how they act as a guide for your perfect retirement plan.
Similarities and Differences in 401 (k) vs Roth IRA
| SIMILARITIES | DIFFERENCES |
| Both offer Tax-free Distributions in Retirement | Contributions Amounts: the maximum an individual can invest in Roth IRA currently is $6,000 or $7,000 (if you are 50 years or old). But, in 401 (k) three times higher amounts are allowed. The employee contribution limit is $19,500 per year or $26,500 if 50 years or older in 2020. |
| Neither of them provides Tax-Deductible Income | Employer Matching Contributions: in 401(k) the employer offers 50 percent contribution to your investment. However, Roth being a self-directed account, contributions from employers does not arise. |
| Both allow Withdrawal of Contributions from any one of the plans that too Tax-free | Loan Provision Availability: in 401 (k) employer offers 50 percent from the investment in your account, up to a maximum of $50,000. |
| Both are offering Tax-deferred Investment of Fund Returns | Require Minimum Distributions (RMDs): 401 (k) plan allows you to take mandatory distributions from 70 years 6 months onward. In Roth, RMDs are not allowed. Your amount grows for the rest of your life. The benefits are for your legal heir (s) to get a huge sum of funds once you are dead. |
| Accumulated Invested Earnings when Withdrawn early are Taxable | Income Limits: in 401(k) there are no restrictions on contributions in income limits. In the Roth IRA there are restrictions on income contributions. |
| Distributions made from both will in any way affect your benefits in Social Security | Trustee and Investment Selection: 401(k) being an employer-sponsored plan the trustee selected may charge a high fee. In Roth, there are unrestricted investment options. |
Which plan is better?
Between them, there is no choice people have between both annuity investment plans. You are allowed to have both according to current US laws. This allows you to get a higher yield. In 401 (k) higher contributions make it beneficial and in Roth IRA you can invest as long it does not cross the required limits. This means you can select in best 401 (k) investment plans as well as contributions in the Roth IRA. The advantage here is you have a choice in case you leave your employer. Thereafter, you can transfer your money in a 401 (k) to Roth account.
According to an analysis done on both 401 (k) and Roth IRA, a full contribution of $18,500 to 401 (k) and $5,500 to Roth IRA will total up to $24,000. In addition, both investments are tax-free. I have no idea what your income limit is, but when you can make such a large contribution, it is better to go for both IRA plans. You will not need to crunch numbers on them.
