By:  Crystal Kessler, CFP®, Wealth Advisor/Financial Planner

There is a lot of confusion when it comes to In-Plan Roth’s (i.e., Roth 401k or Roth 403b) and a Roth IRA. Throughout this article we will refer to just Roth 401ks but know the rules we refer to for Roth 401ks apply to other In-Plan Roth’s like 403bs. It is important to realize that these are two completely different investment vehicles, and they both have very different rules when it comes to eligibility and contributions.

First off, it helps to know the difference between Traditional vs. Roth. It mostly boils down to when you pay your taxes -now or later. With a Traditional Retirement Plan (i.e., 401k or 403b) or Traditional IRA (Individual Retirement Account), you make contributions with pre-tax dollars, and you get a tax break up front, thus helping to lower your current taxable income. Both contributions and earnings grow tax-deferred, meaning you do not pay taxes on it, until you withdraw it. With a Roth 401k or Roth IRA, it’s basically the reverse. You make your contributions with after-tax dollars, meaning there’s no upfront tax deduction and your income taxes are paid on that money before it goes into the account. Due to this, both the contributions and earnings grow tax free, and any withdrawals are tax free after you reach age 59 ½ (*withdrawals are tax free provided they are made at least 5 years after the first Roth contribution was made).

A Roth 401k is an employer sponsored retirement plan where an individual makes contributions directly from their paycheck to their company sponsored retirement account. Most employer plans give you the option to make your employee contributions to a Traditional 401k or a Roth 401k.

A Roth IRA is an account one can open at any investment firm and contribute to as long as they have earned income. However, there are income limitations to Roth IRAs when it comes to being able to contribute. To make a full contribution to a Roth IRA, as a single filer you must make less than $125,000 for 2021 ($129,000 for 2022). For married filing jointly, the combined income must be less than $198,000 for 2021 ($204,000 in 2022). The maximum contribution limit is $6,000 a year. However, there is a $1,000 catch-up contribution if you are over the age of 50. This allows an individual to contribute up to $7,000 if he or she is over the age of 50. If you are married and make less than the income limit, each spouse can make a full contribution to each of their Roth IRAs.

Example: If Jack (age 53) and Jill (age 54) file married, jointly and make less than $198,000 combined income in 2021 then Jack can contribute $7,000 to his Roth IRA and Jill can contribute $7,000 to her Roth IRA by April 18th, 2022, since they are both over age 50 and made less than the income limit set for 2021.

Most of the confusion with Roth 401k’s centers around if individuals can contribute to them because they see “Roth” and assume that if they make too much money then they can’t contribute to it. That is very wrong when it comes to Roth’s in retirement plans. Most employees are eligible for a Roth 401k and can contribute to it as long as their employer offers it in their retirement plan. A Roth 401k has no income limit whatsoever. The only limitation a Roth 401k has, is the plan’s contribution limit. For 2022 employees can contribute up to $20,500, and anyone over the age of 50 can make an additional catch-up contribution of $6,500. What is important to consider when contributing to a Roth 401k is the fact that you will be taxed on your income before you contribute to the Roth 401k, but the contributions and earnings grow tax free within the Roth 401k.

Example: Let’s look at Jack (age 53) and Jill (age 54) who file married, jointly and make $325,000 combined taxable income in 2022. Although they make too much to contribute to a Roth IRA, they can still contribute to a Roth 401k. Let’s say Jack maxes out his Roth 401k for the year, and because he is over age 50, he can make a maximum contribution, due to the catch up, of $27,000. He will be taxed on that $27,000 at their marginal tax bracket of 24%, but that full $27,000 will be contributed to the Roth 401k and grow tax free. Come retirement when Jack and Jill take distributions from the account it will all be income tax free. Another big difference between a Roth 401k and Roth IRA, is that Roth 401k accounts are subject to required minimum distributions. You are required to start taking tax-free withdrawals at age 72 from an Roth 401k. Roth IRA’s do not have this required minimum distribution requirement. However, you can rollover your Roth 401k account to a Roth IRA before age 72 and avoid the required minimum distributions.

	Roth 401k	Roth IRA
Income Limitations	No Income limitations	Single: Make less than $125,000 for 2021 ($129,000 for 2022).                                    Married filing jointly: Combined income less than $198,000 for 2021 ($204,000 in 2022).
Contributions:	$20,500 for 2022                *Catch-up contribution if over age of 50 of $6,500	$6,000 2021 and 2022. *Catch-up contribution if over age of 50 of $1,000
Deductibility:	None	None
Contributions and Earnings	Grows Tax-Free	Grows Tax-Free
Withdrawals after age 59.5*	Income Tax Free	Income Tax Free

* Withdrawals are tax free provided they are made at least 5 years after the first Roth contribution was made.

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