"In that case, account holders can roll the account over from a 401(k) directly to a Roth IRA," says Paul Hynes, a principal at Burns Advisory Group.
The match in a 401(k)
Besides their high contribution limits, 401(k)s have another advantage: The worker's contributions can be matched by the employer up to a certain percentage. It's essentially free money from the employer, on top of the employee's elective deferrals.
However, if you are contributing to a Roth 401(k), the match portion of the contribution will be treated as a traditional 401(k) contribution because it goes in pretax.
"The employer part never reaches you, so it can't be done on an after-tax basis," says Barber. "The match from the employer can't be taxed so it can't be a Roth."
That means that every Roth 401(k) account essentially has a traditional component if the employer provides matching contributions.
For workers who divide contributions between a regular 401(k) and a Roth 401(k), the company match will be applied to the traditional 401(k).
A Roth IRA allows investors a great deal more control over their accounts than a Roth 401(k). Investors can choose from the universe of investments for their own accounts, including individual stocks and bonds, but are limited to the funds their employers offer in a 401(k) plan.
Depending on their plan's investment menu, some employees might be better off maximizing the match from their employer and then funneling extra retirement dollars into a Roth IRA. That way they can take advantage of better investment options if the fund lineup is too limited in the employer's plan.
With the new rules for Roth conversions, high earners can convert to a Roth IRA from a traditional IRA, but they won't be able to make contributions.
Not so for a Roth 401(k), in which there are no such restrictions.
Roth IRA contributions are off-limits if your modified adjusted gross income in 2010 is higher than $176,000 for married couples filing jointly or $120,000 for single filers.
"For some people, the only access they would have to Roth contributions is through the 401(k)," says Hynes.
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