Roth IRA or Roth 401(k)?

The introduction of the Roth 401(k) added an excellent new retirement savings strategy for workers. It also added more confusion to the already-difficult retirement planning conundrum. So which is better: the Roth 401(k) or the Roth IRA?

Roth IRA contributions were first accepted in 1998. That year, $8.6 billion went into these retirement plans, with another $39 billion transferred from traditional IRAs to Roth IRAs. By 2001, IRS data showed that contributions to Roth IRAs had surpassed the amount going into traditional IRAs. Why the shift?

Money earned in a Roth IRA can be taken out in retirement tax-free. Contribution limits for Roth IRAs are generally the same as with traditional IRAs, with one major difference: as long as you keep earning money, you can contribute to a Roth, regardless of your age. In contract, the traditional IRA requires minimim withdraws at the age of 70 1/2.

Roth IRA Plan

Advantages: The earnings are tax-free. This is very appealing to young account holders who open a Roth early and let the money grow for decades, as well as individuals who expect to be in the same or possibly higher tax bracket when they retire. You can contribute at any age and can take money out on your timetable, not the IRS's age 70 1/2 withdrawal schedule required of Traditional IRAs.

Disadvantages: Contributions are not tax deductible. There is an earnings limit which restricts higher-income taxpayers from contributing or converting traditional IRA money to a Roth IRA.

Roth 401(k) Plan

These accounts combine the basics of 401(k)s with the tax-free aspect of Roth IRAs. Essentially, workers put money into Roth 401(k)s after payroll taxes are withheld, meaning the account doesn't offer an immediate tax benefit. But when the money is withdrawn, it is tax-free.

Advantages: Distributions are tax-free. Contributions, as with regular 401(k)s, are higher than for IRAs. Employer matching contributions increase your retirement savings. There are no adjusted gross income caps, so higher-income workers who may not be able to open a Roth IRA can contribute to a Roth 401(k). Also, you can leave the money in the account past age 70 1/2.

Disadvantages: These are not yet as available as regular 401(k) plans. Because money goes into this account after taxes are withheld, you get no immediate tax break.

Whether your 401(k) is a regular or Roth account, ultimate responsibility for your workplace retirement savings rests entirely on you. You generally must enroll in the account and then manage it, deciding which 401(k) offering best fits your personal financial situation.