I recently had trouble understanding the difference between the regular Roth IRA and the company-sponsored Roth 401(k). So thought I share the knowledge with you;
- Both of them are after-tax investment. You pay tax upfront and then the money will grow tax-free. When you withdraw at retirement you don’t pay taxes.
- Roth IRA has income limit of $183,000 (house-hold) or $116,000 (if single). If you make that much you cannot invest in Roth IRA. While in Roth 401K you can invest no matter how high is your income, there is no income limit which is obviously a great choice for high earners.
- Contribution limit is also different. For Roth IRA, the maximum you can put is $5,500 per year. While in Roth 401K, you can put a maximum of $17,500 (or $23,000 if over 50 years old), just like the traditional tax-deferred 401K limits.
Clearly Roth 401K is the best option for employed individuals with high income.