Comparisons of Roth 401k, Roth IRA, and Traditional 401k Retirement Plans

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Comparison of Roth 401k, Roth IRA, and Traditional 401k Retirement Plans

By John E. Buckley, Economist, Division of Compensation Data Analysis and Planning, Bureau of Labor Statistics, U.S. Department of Labor. He may be reached at 202.691.6299 or Buckley.John@bls.gov.

Employers now have a new retirement savings plan to offer their employees--the Roth 401k plan, which combines features of Roth IRAs and traditional 401k plans.

Beginning January 1, 2006, employers have a new retirement savings option to offer employees. The plan, commonly referred to as a "Roth 401k," is a hybrid that combines features of Roth IRA and traditional 401k plans but differs in important aspects. Some of the differences and similarities are outlined in the chart below.

Employees who already have a regular 401k plan can participate in a Roth 401k if the employer offers it. However, the combined total contributions cannot exceed the Internal Revenue Service limit set for individual plans--that is, $17,500 (or $23,000 for employees aged 50 or over) in 2014. An employee who participates in both plans can designate the amount to be applied to each plan. Once a decision is made, the participant cannot switch money among the plans. (Roth 401k participants who change employers can roll over the proceeds into a Roth IRA.)

If an employer provides a matching contribution to a Roth 401k, two accounts are set up for each participant. The first contains the employee's after-tax contributions that will be distributed tax free. The second account contains the employer's before-tax contributions and any investment growth; these funds are taxable when distributed.¹

The National Compensation Survey (NCS) publication "Employer Costs for Employee Compensation" ² presents employer costs data for various employee benefits. Currently, information is available for defined contribution retirement plans that includes data for traditional 401k plans. When the NCS encounters the new Roth 401k plans, they will be included as defined contribution plans in the NCS benefits incidence and provisions estimates.

Comparison of Roth 401k, Roth IRA, and Traditional 401k Retirement Plans

Roth 401k plan	Roth IRA	Traditional 401k plan
Employee contributions are made with after-tax dollars.	Same as Roth 401k plan.	Employee contributions are made with before-tax dollars.
Investment growth accumulates without any tax consequences.	Same as Roth 401k plan.	Investment growth is not subject to Federal and most State income taxes until funds are withdrawn.
No income limitation to participate.	Income limits: married couples, $191,000, singles, $181,000 adjusted gross income in 2014.	Same as Roth 401k plan. No income limitation to participate.
Contribution limited to $17,500 in 2014 ($23,000 for employees 50 or over).	Contribution limited to $5,500 in 2014 ($6,500 for employees 50 or over).	Same as Roth 401k plan.
Withdrawals of contributions and investment growth are not taxed provided recipient is at least age 59½ and the account is held for at least five years.	Same as Roth 401k plan.	Withdrawals of contributions and investment growth are subject to Federal and most State income taxes.
Distributions must begin no later than age 70½. (This may change.)	No requirement to start taking distributions.	Same as Roth 401k plan.

Footnotes

1. More information on the latest regulations regarding Roth 401k plans can be found at the Internal Revenue Service (IRS) website at www.irs.gov/pub/irs-regs/td_9237.pdf.
2. See Employer Costs for Employee Compensation, 1986-99, Bulletin 2526 (Bureau of Labor Statistics, March 2000).

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