Is a Roth IRA better than a Roth 401(k)?

Dan Moisand for MarketWatch.com writes: While Roth IRAs and Roth 401(k)s are both funded with after-tax dollars and withdrawals from either can be tax-free, there are several differences that can be important. This week's featured question delves into some of the key differences.

Q. Could you tell me differences in dispersments of 401k Roth verses IRA Roth... Does one have an advantage to the other? — L.C.

A. Whether one type of plan is more advantageous to you, L.C., is a function of the particulars of your situation. Generally, people accumulating funds favor the 401(k) while retirees tend to prefer the IRA. You'll see why after I outline the basics starting with distributions.

Distributions — Distributions of earnings from a Roth 401(k) will be tax free if taken after age 59 ½ and it has been five tax years or more since Jan. 1 of the year you first contributed to the Roth 401(k). Withdrawals can only be made, if you are eligible for a distribution from the 401(k) (death, disability, separation from service)

Withdrawals from a Roth IRA can be taken at any time in the following order: Contributions, converted amounts, earnings. Withdrawals of contributions are always tax free. Generally, converted amounts and earnings are tax free if the applicable five-year rules are satisfied and taken after age 59 1/2.

Required Minimum Distributions (RMD) — RMDs are required from Roth 401(k)s once your reach age 70 1/2, unless you are still employed by the company providing the 401(k) then and less than a 5% owner. Once such employment ends, RMDs are applicable.

No RMDs are required from your Roth IRAs during your lifetime.

Contribution eligibility — If your 401(k) offers a Roth option, all employees eligible to contribute to the 401(k) may contribute to the Roth regardless of their income.

A maximum contribution to a Roth IRA is limited to persons who have earned income of $5,500 or more but an Adjusted Gross Income (AGI) under $114,000 for singles, $181,000 for joint filers. Single filers with an AGI above $129,000 and joint filers with an AGI over $191,000 cannot make a Roth contribution.

Contribution amounts — For 2014, Roth 401(k) contributions are limited to the lesser of 100% of wages or $17,500 ($23,000 if over age 50)

Roth IRA contributions are limited to the lesser of 100% of wages or $5,500 ($6,500 if over 50)

Matching — Contributions to a Roth 401(k) may be eligible for a matching contribution from your employer. No match is made to Roth IRAs.

Conversions — Moneys inside a 401(k) can only be converted to the Roth 401(k) if the plan specifically allows such conversions. Conversions to Roth 401(k) cannot be reversed or "recharacterized.”

Any of your IRA moneys, other than those subject to Required Minimum Distributions, can be converted to a Roth IRA. Conversions can be recharacterized as late as Oct.15 of the year after the year of conversion.

So, because more money can be accumulated in a Roth 401(k) at any income level, generally those saving for retirement prefer the Roth 401(k). Retirees tend to prefer the Roth IRA, because no RMDs are needed allowing funds to continue to grow tax free.

You can learn more in detail about the author Dan Moisand Here.

Dan Moisand is a founding partner with  

You can visit Dan Moisand's firm by clicking here.