Written By Jenny Kiffmeyer, J.D – The Retirement Learning Center
“What are the differences between Roth IRAs and designated Roth 401(k) accounts?”
Highlights of the discussion
While there are commonalities, the following chart summarizes several key differences between Roth IRAs and designated Roth 401(k) accounts.
ConclusionWhile both Roth IRAs and designated Roth 401(k) plan contributions offer the potential for tax-free withdrawals, there are several key differences between the two arrangements. Whether one, the other, or both may be right for a particular investor depends on the individual’s circumstances and goals and should be determined based on a thorough conversation between the investor and his or her tax advisor.
| Feature | Roth IRA | Designated Roth 401(k) Account |
| Investment Options | Generally, unlimited, except for life insurance and certain collectibles | As specified by the plan document |
| Eligibility for Contribution | For a full contribution, single filers must have earned income under $153,000 and, if married filing jointly, must have income under $242,000. Contributions are phased out for single filers with modified AGI (MAGI) of $153,000 to $168,000, or joint filers with MAGI of $242,000 to $252,000. |
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| Contribution Limit (2026) | $7,500 ($8,600 if age 50 or older) combined with Traditional IRA contributions | $24,500 ($32,500 if age 50 or older or $35,750 if age 60-63 and plan allows) combined with pre-tax deferrals; special catch-up rules may apply to 403(b) and 457 plans |
| Conversions | Anyone with eligible IRA or employer-plan assets may convert them to a Roth IRA | Plan permitting, anyone with eligible plan assets may convert them within the plan to a designated Roth account |
| Can Recharacterize Regular Contribution | Yes, within prescribed period | No |
| Required Minimum Distributions | Not during owner’s lifetime | Not during owner’s lifetime (change as of 2024) |
| Tax- and Penalty-Free Qualified Distributions |
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Must have a distribution-triggering event under plan terms, plus:
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| Tax and/or Penalty on Nonqualified Distributions | According to IRS distribution ordering rules:
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Withdrawals represent a pro-rata return of contributions and earnings in the account. Earnings are taxable and subject to penalty unless an exception applies. See IRS Notice 2010-84 and IRS Notice 2013-74 for additional guidance. |
| Timing of Distributions | At any time, subject to tax and/or penalty depending on the type of assets distributed | Following plan-defined distribution-triggering events |
| Loans | No | Yes, if the plan permits |
| Five-Year Holding Period for Qualified Distributions | Begins January 1 of the year a contribution or conversion is made to any Roth IRA of the owner. |
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| Beneficiary | Anyone, but spousal consent required in community property states | Anyone, but spousal consent required |
Conclusion
While both Roth IRAs and designated Roth 401(k) plan contributions offer the potential for tax-free withdrawals, there are several key differences between the two arrangements. Whether one, the other, or both may be right for a particular investor depends on the individual’s circumstances and goals and should be determined based on a thorough conversation between the investor and his or her tax advisor.
