Why Is A Roth IRA Better Than A Roth 401(k)?

Maybe you’re better off saving your money in a Roth IRA as opposed to a Roth 401(k). Of course, sometimes you simply don’t have a choice.

“One of the key advantages of a Roth IRA vs. a Roth 401(k) is that everyone that earns under a certain level of income has access to establish it and fund it annually,” says Daniel G. Dolan, Principal at TFB Advisors, LLC in Overland Park, Kansas. “Not all employer-sponsored 401(k) plans offer the Roth option, so having access to the Roth IRA is critical to accumulate after-tax dollars.

Even if your company does offer a Roth option in its 401(k) plan, you may still prefer the Roth IRA because it features greater flexibility and customization.

“One advantage that most often comes to mind is the ability to open your Roth IRA wherever you want,” says Derek Amey, Partner and Advisor at StrategicPoint Investment Advisors in Providence. “With the Roth 401(k) you’re beholden to your 401(k) plan’s investment choices, which may have limited fund options and unfortunately sometimes expensive fund options. With a Roth IRA you can open it where you want to and invest your money any way that you would like, individual stocks, ETF’s different mutual funds etc.”

Often overlooked is the requirement to defer your salary in the 401(k) option with every paycheck. Sometimes you won’t know how much to contribute or when to make your contribution, (this includes waiting until the following tax year to contribute). If this is the case, then the Roth IRA may be more to your liking.

“Contributions to a Roth 401(k) have to be made from payroll, but Roth IRA contributions can be made from other sources of savings and are not due until the tax filing deadline of the taxpayer,” says Herman (Tommy) Thompson, Jr., a Financial Planner with Innovative Financial Group in Atlanta. “The investor has the freedom to make contributions beginning in January and up to sometime in April the following year for a given tax year. This level of flexibility allows taxpayers to prepare their returns and make contributions as needed.”

There are tradeoffs, however, and you should probably try to make yourself aware of them. These generally have more to do with the investment vehicle, whether or not you select the Roth option.

“The advantages of each are two sides of the same coin and not necessarily related to Roth itself,” says Larry Starr, President of Qualified Plan Consultants, Inc. of West Springfield, Massachusetts. “For example, the plan Roth may offer investment choices at fees that are more attractive than an individual Roth IRA. The individual option may offer more choices than the plan.”

While often true, it’s not necessarily the case that the Roth 401(k) represents the cheaper option. Even if your firm’s plan has access to mutual funds with smaller expense ratios, all corporate retirement plans must pay operational expenses not found in IRAs.

“Most IRAs are relatively inexpensive and can be found at virtually any financial institution,” says Jason Grantz, Managing Director, Institutional Retirement Consulting at Integrated Pension Services in Highland Park, New Jersey. “401(k) plans frequently have administrative and other costs built into the plan and passed to the participants. Another difference which could be an advantage or may not be, is that IRAs usually have more investment flexibility than the curated options typically available in most 401(k) plans. This may give knowledgeable investors the ability to invest in more complex investments and engage in more sophisticated strategies.”

What goes in must also come out, and here’s the most powerful advantage you can find in the IRA alternative for a Roth. “It is easier to get access to your money in retirement than from a Roth 401(k),” says Matt Gray, Founder of AnthroFi Wealth Group in Denver.

Roth 401(k) options both make it harder to take your money out and, at the same time, force you to take it out perhaps earlier than you wish.

“No Required Minimum Distributions (“RMDs”) are required from a Roth IRA and you don’t need a qualifying event to access your principal,” says Kit Gleason, VP/Senior Relationship Manager, First Bank & Trust in Sioux Falls, South Dakota. “There are proposals in front of Congress now that would change the RMD situation, but it remains to be seen if these changes make it into the final legislation.”

You may have access to your Roth 401(k) assets in case of an emergency, but there are some strings attached.

“You won’t be able to avoid the 10% penalty unless you are over the age of 59½,” says Matthew Newman, Vice President of Client Services & Senior Financial Advisor at High Probability Advisors, LLC in Buffalo. “Some employers have very limited or strict rules for reasons an employee can access their money prior to retirement age or termination.”

Yes, you can certainly save more money in a Roth 401(k), but you’ll need to be earning more money to do this. Even if you are, if you’re not earning above a certain amount, you can continue to save in both vehicles. That will allow you to experience the best of both worlds.

Alone, though, don’t sell the Roth IRA short. I does provide plenty of good benefits.

Can you think of more advantages? Share your thoughts in the comment section below because you might just be helping someone get closer to the retirement they desire.

As usual, there is another side to this story. You can read it here: “Why Is A Roth 401(k) Better Than A Roth IRA?”