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A Roth 401(k) and a Roth IRA sound similar — and they are.

Contributions are made after taxes — meaning your taxable income isn’t reduced by the amount of your contributions when you file your taxes. But you get a tremendous tax advantage down the road, since earnings can be taken out tax-free at age 59 1/2.

Roth IRA and a Roth 401(k): 6 differences

However, the Roth 401(k) has a few key differences from the Roth IRA. Here’s what to know before deciding which account is right for you.

1. Contribution and income limits

The most distinguishing characteristic of 401(k)s, whether Roth or traditional, is the high contribution limit, allowing employees to save up to $19,000 per year in 2019. For workers over 50, the ceiling is $25,000.

Meanwhile, IRA contribution limits are $6,000, and workers over 50 may contribute up to $7,000 per year.

There are, however, income limitations for Roth IRA contributions. If your modified adjusted gross income in 2019 is $203,000 or more for married couples filing jointly or $137,000 or more for single filers, the accounts are off-limits.

There are no income limits on Roth 401(k)s.

2. Distributions

A benefit of the Roth IRA is that the account can exist, essentially, forever without any minimum required distributions.

A benefit of the Roth IRA is that there is no requirement to start taking distributions while the account holder is still alive.

Should the account holder pass away, only their spouse won’t be required to take distributions or pay taxes. Anyone other than their spouse who is listed as a beneficiary will be required to withdraw a minimum amount each year.

3. The match in a Roth 401(k)

Besides their high contribution limits, Roth 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), your employer’s match will be placed into a traditional 401(k).

“The employer part never reaches you, so it can’t be done on an after-tax basis,” says Dean Barber, founder and CEO of Barber Financial Group.

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).

4. Investment options

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, 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.

Also check the expense ratios of the funds in your Roth 401(k) plan. The lower the expense ratio, the higher your return. Investors paid an average of 0.52 percent for their mutual funds and exchange-traded funds in 2017, according to Morningstar Research Services’s most recent data. If the funds in your 401(k) plan run higher than 1 percent, strongly consider investing in a Roth IRA.

5. Income limits

Roth IRA contributions are off-limits if your modified adjusted gross income in 2019 is $203,000 or more for married couples filing jointly or $137,000 or more for single filers.

Meanwhile, there are no income limits on Roth 401(k)s.

6. Rules for early withdrawals

Withdrawals from both Roth 401(k)s and Roth IRAs are tax free if they meet certain criteria:

  • The accounts must be held for at least five years.
  • Distributions are made in the event of disability or death or the account holder reaches age 59 1/2.

You can always take out the money you contributed to either Roth account without tax repercussions. But if you want to take out earnings as well as contributions early without paying taxes or an early-withdrawal penalty, you generally would have to take out a loan with the Roth 401(k) if the plan permits.

With a Roth IRA, you can withdraw up to $10,000 to buy, build or rebuild a first home and avoid paying taxes and the 10 percent early withdrawal penalty even if you are under age 59 1/2.

You can have a Roth IRA and a Roth 401(k)

Yes, it is possible to have both a Roth IRA and a Roth 401(k) at the same time. However, keep in mind that a Roth 401(k) must be offered by your employer in order to participate.

If you don’t have enough money to max out on contributions to both accounts, it’s recommended to max out the Roth 401(k) first to receive the benefit of a full employer match.

Roth IRA or Roth 401(k): Which is better?

Determining which account will best suit your needs depends on your current and future financial situations, as well as your own specific goals.

High earners who want to make contributions to retirement accounts each year should consider a Roth 401(k), because they have no income caps. Additionally, individuals who want to make large contributions can make almost three times the amount in a Roth 401(k) rather than a Roth IRA.

Those who want more flexibility with their funds, including no required distributions, might lean toward a Roth IRA. This would especially be helpful if you want to leave the account to an heir.

Saving for the future is important. Not sure where to start? Use Bankrate’s retirement calculators to explore your options for investing in your future.