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Source: TaxCredits.net.

Most of us need to save a significant sum for our retirements, and tax-advantaged retirement plans can help us do so. Roth accounts are especially appealing since they offer the opportunity to eventually withdraw money from them tax-free. Roth accounts come in several forms; let's review the Roth 401(k) vs. the Roth IRA to see which is best for you.

The need
According to the 2014 Retirement Confidence Survey, 60% of American workers have less than $25,000 saved for retirement (excluding the value of their home), and 36% of American workers have less than $1,000 saved. 401(k)s and IRAs can go a long way toward remedying that worrisome situation.

The Roth concept
With a traditional IRA or 401(k), you contribute money on a pre-tax basis. The value of your contributions is subtracted from your taxable income, so it reduces the tax you pay now. (For example, if your taxable income is $60,000 and you contribute $5,000, your taxable income falls to $55,000, shielding $5,000 from tax in your contribution year.) The money grows tax-deferred until you withdraw it in retirement, when it's taxed as ordinary income.

The Roth IRA and the Roth 401(k), meanwhile, accept only post-tax contributions from you, so you get no tax break up front. (Taxable income of $60,000 and contribution of $5,000? Your taxable income is still $60,000.) But if you follow the rules, you can eventually withdraw the money in the account completely tax-free.

There's an extra twist for the Roth 401(k), though: If the employer makes matching contributions, those are considered to have been made with pre-tax, not post-tax, dollars. They typically go into a separate account and receive the same tax treatment as a traditional 401(k) account.

Pros and cons of the Roth 401(k) and Roth IRA
Here are the main pros and cons of Roth 401(k)s and Roth IRAs:

 

Pros

Cons

Roth 401(k)

  • Often feature available matching contributions from employer.
  • Higher maximum contribution ($18,000 for 2015, plus $6,000 for those 50 and older).
  • There are no income limits for contribution eligibility -- high earners can contribute.
  • Required minimum distributions begin at age 70 1/2.
  • Investment options often limited to a group of funds.
  • Some investment options might charge steep fees.

Roth IRA

  • Broad range of investment possibilities -- just about any stock, bond, or fund.
  • No withdrawal requirements -- the account can be passed on to heirs.
  • Can open an account at a brokerage that charges low fees and choose no-load funds, too.
  • Lower contribution limit ($5,500 for 2015 plus $1,000 for those 50 and older).
  • No matching contribution from employer.
  • High earners can't contribute to IRAs (specifically, adjusted gross incomes above $131,000 for singles and $193,000 for married folks filing jointly).

It's worth noting that you might avoid the required withdrawals from a Roth 401(k) by converting it to a Roth IRA.

Images

The Roth 401(k) and Roth IRA can help you achieve a wonderful retirement. Source: Frank Kovalcheck, Flickr.

What to do
The choice for you might be clear already. If your workplace doesn't offer a Roth version of its 401(k) yet, then that's out of the question. (Not all companies with 401(k)s offer Roth 401(k)s, but they're becoming more common, so ask your benefits department about it.)

You don't even have to choose between the two options -- you can make use of both! Participate in your workplace's 401(k), Roth or not, and also contribute to a Roth IRA. If you only have a few dollars to contribute, though, a Roth IRA offers more flexibility and investment options. (Try not to leave any employer-matching funds on the table, though -- contribute enough to your 401(k) to max that out, as it's free money.)

One good strategy if you can't max out both contribution limits is to contribute enough to the 401(k) to get all available matching dollars, then max out your IRA if possible, and then contribute any additional available investment money through your 401(k).

However you go about it, be sure you're growing a nest egg large enough to give you a comfortable retirement.

If you need help picking an individual retirement account, use the Fool's IRA Center to explore the options.

Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.