What is the difference between....... (retirement fund related)

jessica490 · June 2014

A Roth 401K and a Roth IRA?

uncreatedsnow · June 2014

Haha I have NO idea and was just thinking of asking for a Roth IRA for dummies explanation.

Looking forward to this thread!

jessica490 · June 2014

maybe there is no such thing as a roth 401K but i know I saw it when I was browsing Fidelity's website just now....

maple2 · June 2014

Ignoring the Roth part right now, a 401k is an employer sponsored retirement plan while an IRA is a retirement savings option that an individual sets up and manages on his/her own. If your employer offers a 401k plan, you can contribute to both a 401k through work and and IRA on your own. If your employer does not offer a 401k plan, you can generally still contribute to an IRA. (Note: There are can be limits on the amount you can contribute to each of these based on your income or employer rules.)

A Roth 401k or IRA is an alternative to a traditional 401k or IRA. When you use a traditional 401k or IRA, you invest your money pre-tax, meaning that you don't pay taxes on it in the year you earn it, but you then do have to pay taxes on your contributions and the interest they have earned when it is time to withdraw. A Roth 401k or IRA allows you to contribute post-tax, so you do pay taxes on the income in the year you earn it, but you do not pay taxes on either your contribution or the interest when you withdraw (assuming laws don't change and you don't withdraw early). In general, people recommend Roths for people who are younger because the money you invest has the potential to grow a lot and none of that interest will be taxed.

While you usually have the option whether to open a Roth or traditional IRA (caveat being that there are income restrictions), it is entirely up to your employer whether there is a Roth 401k option. My experience is that there generally is not.

jessica490 · June 2014

Ok, I saw this where I am able to change my percetages and I figured it was a Roth IRA that they mean, but when I was clicking on different articles they sometimes said Roth401K so I got confused. I just got my raise so I'm calling them tonight to open a Roth IRA if I can. So since my company matches 5%, I'm going to put the 2% into the Roth and another another 1-2% for now if that's the way I should be doing it..

Contribution Amount

PRE-TAX
Current Election	7 %
Desired Election	%
(0% to 75% in increments of 1%)

ROTH
Current Election	0 %
Desired Election	%
(0% to 75% in increments of 1%)

Contribution Amount Total
Current Election	7 %
Desired Election	%
(0% to 75%)

vlagrl29 · June 2014

I would assume a Roth 401k is thru an employer and a Roth IRA is thru yourself

hoffse · June 2014

Yes, Maple is correct.

401(k) = funded through your employer. Maximum contribution limits for all forms of 401(k)s are $17,500 per person, per year (for now).

IRA = funded entirely on your own ("IRA" stands for "individual retirement account"). Maximum contribution limits for all forms of IRAs are $5,500 per person, per year (for now).

"Roth" = contributions are post-tax and all contributions grow tax-free. You can take it out when you retire, but you don't have to. You don't pay taxes on anything you take out in retirement.

"Traditional" or "regular" = contributions are pre-tax and you get a deduction in your contribution year. However, they do not grow tax free so you pay taxes on your original contribution AND gains when you withdraw in retirement. These accounts also have required minimum distributions, so you can't just take the deduction in your 30's, live off your Roth accounts in retirement, and then never have to pay taxes on the regular accounts.

Basically Roth vs. regular/traditional has to do with tax treatment. IRA vs. 401(k) has to do with how the plan is set up - either through you or your employer.

There is absolutely something called a Roth 401(k). Many employers offer them - not all do. If you're interested in it, ask your HR person. I will say that they are probably more common with larger companies, although the trend in the last few years has been to add a Roth 401(k) as a plan option. Both law firms I've worked for have them, both firms my H clerked at have them. In your 20's and 30's these are pretty great because the contribution limits are higher than IRAs, but they still use the Roth tax treatment. And most employers who will match a traditional 401(k) will also match a Roth 401(k).

If you ask your HR person about Roth 401(k)s, and they have no idea what you're talking about (many of them do not), it might be worth calling the investment company that services your employer's 401(k) plan directly. In my experience, the investment people can look up the plan and tell you if it's an option.

**Not legal advice.

arj14 · June 2014

Hopefully this question is on topic enough - I currently have a 401(k) through one of my employers, but will be leaving there this summer. I assume it will be rolled over somewhere (not sure where). If it rolls over into a traditional IRA, can I change that to a Roth or would I have to open a different IRA for that?

Also, depending which bank / company it is moved to, do I have any choice to move it elsewhere? What kinds of places service IRAs?

hoffse · June 2014

arj14 said:

Hopefully this question is on topic enough - I currently have a 401(k) through one of my employers, but will be leaving there this summer. I assume it will be rolled over somewhere (not sure where). If it rolls over into a traditional IRA, can I change that to a Roth or would I have to open a different IRA for that?

Also, depending which bank / company it is moved to, do I have any choice to move it elsewhere? What kinds of places service IRA

*****STUCK IN THE BOX

I'm not as familiar with rollovers, but I'm pretty sure you can roll your 401(k) into a regular IRA and then roll the IRA into a Roth IRA. If you do it that way, then roll them over as quickly as possible. I think you have to pay taxes on the IRA when rolling it into a Roth (since regular 401(k) contributions were never taxed and Roth contributions must be post-tax). Generally speaking, the earlier you pay those taxes the better. Once the money is in the Roth account and your taxes are all paid up, it will start to grow tax-free. Again, double check me on that because I've never had a regular 401(k). Others who have done this might be able to correct me if I'm wrong.

All sorts of places service IRAs. Your local bank probably does them. I prefer to use an investment bank (Fidelity, Vanguard, Schwab, Scottrade, etc.) because that's all they do every day. My experience is that their customer service folks are really knowledgeable about retirement accounts and investments generally - more so than the person you might call at your local bank.

jessica490 · June 2014

thanks for clarifying Hoffse! I will be calling Fidelity direct tonight to get the details

smerka · June 2014

Hoffse is pretty much right. When I quit working to be a SAHM, I rolled my 401k into a Rollover IRA with Vanguard. It is set up like a traditional IRA, but Vanguard labels it as Rollover. I have plans to move the rollover money into my Roth, but I can never seem to pull the trigger. I think our tax liability is going to be really low again for 2014, so I will probably do it soon.

What is the difference between....... (retirement fund related)

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