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In order to figure out which retirement saving plan you should take, you first have to understand the difference between the two.
Roth IRA vs. Roth 401k
A Roth IRA is not available to people with a certain income level. Single tax filers who have an income level of 100,000 annual cannot have a Roth IRA. Married couples who file taxes jointly should not have an income level of more than $169,000. This means that the Roth IRA is not suitable for many tax payers.
On the other hand, these limits do not apply for a Roth 401k. You have a Roth 401k if you are part of your employer-sponsored 401k retirement savings plan.
There is a limit to the annual contribution amount for both retirement savings plans. For a Roth IRA, the contribution limit for 2008 is $5,000 for people under 50 years, $6,000 for people 50 years and above. However, the contribution limits for a Roth 401k are much higher. The annual contribution limits for a Roth 401k is $15,500 for people less than 50 years and $20,500 for those who are 50 and over.
However, there might be certain contribution limits that are set by your employer and you might not be able to contribute the maximum amount to a Roth 401k. This said, it goes without saying that most people will be able to set aside more money for retirement than they would using just a Roth IRA.
When it comes to investments, a Roth IRA is better than a 401k. This means that you can invest in just about anything you want to. However, in a Roth 401k, you have to choose your investments from what is offered by your employer. It has been seen that nearly all employers make an effort to ensure that they provide you with high quality mutual funds that are suitable for retirement savings. This can actually work to your advantage as you have to focus on few investment choices.
A Roth IRA allows you to withdraw money should you need it. All you need to do is pay a 10 percent penalty for early withdrawal, if you are not eligible for it. This is not the case with a Roth 401k. You cannot withdraw the money as long as you are employed. If you do withdraw the money early, you will have to pay 10 percent early withdrawal penalty, and federal and state income taxes as contributions to a Roth 401k is tax deductible.
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