Let's say you've invested $5,000 through a Roth 401(k) or a Roth IRA, and the balance has grown to $6,000. You could withdraw your $5,000 in contributions penalty-free, but not the $1,000 in earnings. With a traditional 401(k) or IRA, early withdrawal penalties apply whether you're taking out contributions or earnings.
Pros and cons of Roth 401(k)s vs. Roth IRAs
Both types of Roth plans offer a few notable benefits. Here are the advantages of Roth 401(k)s over Roth IRAs:
- Many employers offer a 401(k) match, which can add to your Roth 401(k) contributions. That's a benefit you won't get with a Roth IRA.
- Roth 401(k)s have higher contribution limits than Roth IRAs.
- There are no income limits to be eligible for a Roth 401(k). High earners can't contribute to Roth IRAs.
Here are the advantages of Roth IRAs over Roth 401(k)s:
- You can open a Roth IRA whether or not you have access to a workplace retirement plan. A Roth 401(k) is only an option if your employer offers it.
- Roth IRAs provide a broad range of investment options, including stocks, bonds, and ETFs. Roth 401(k) investments are more limited and determined by the plan sponsor.
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