From Allen’s Desk: What Are the Differences Between Roths…Submitted by Guidant Planning on June 7th, 2011
By Allen G. Yee
Roth IRAs and Roth Employer Plans that is. When the word Roth is tossed into conversation, most people’s minds go directly to a Roth IRA. However, the IRS has now paved the way to a new Designated Roth in an employer plan; they include 401(k), 403(b), and 457 plans. But as they say, there is only so much in a name. So what are the differences between the two, if there are any?
The first distinction between the Roth IRA and Designated Roth is the availability or access to your funds. Remember an employer plan is an employer plan regardless of the type of account, i.e. 401(k) or Roth 401(k). This means there are certain inherent limits to accessing your funds. Yes, all retirement accounts, IRAs included, have limitations due to IRS Regulations which apply universally to all qualified plans. But often the rules of an employer’s plan place further limitations on when you can access your own funds. Generally they can be more restrictive than IRS rules.
Another significant distinction is required minimum distributions (RMDs). Although an employer account is accumulating tax-free (Designated Roth accounts, whether be it 401(k), 403(b), etc) it is still subject to plan rules. So beginning no later than April 1st in the year following your 70 ½ birthday you must begin minimum distributions. This distinction may not be too great if you’re plans are to use these distributions to supplement retirement. However, if your goal is to build tax-free legacy wealth, then it’s huge. Roth IRAs do not require minimum distributions over the owner’s lifetime. Further, if the owner passes away the spouse can roll those proceeds into her own Roth IRA which also does not require minimum distributions. This can further provide greater tax-free compounding to future generations.
The last distinction I’ll review is contributions. A significant advantage for the Designated Roth is that it does not have income limitations that prevent one from making contributions. For example, if your income for 2011 is greater than $179,000 for joint filers or $122,000 for single filers you are completely phased-out of making Roth IRA contributions, but not so with an employer plan. Another contribution difference is the total amount one can contribute in a given year; Roth IRAs contribution limits are $5,000 plus an additional $1,000 catch up for 50+ as compared to Designated Roths $16,500 plus $5,500 for catch-up 50+.
Currently, more people have access to Roth IRAs over Designated Roths. Public organizations and private companies have been slow to adopt Roth Plans so few people have choices. As long as your earned income is below the applicable threshold for your filing status you can make a Roth IRA contribution.