Employer offers Roth 401k, should I contribute to this or open a Roth IRA account?

Investing
#1

My employer offers both traditional and Roth 401k. Contributing about 20% of income plus 3.5% match. I’m wondering if I should open up a Roth IRA as well, or just keep continuing to use Roth 401k? I know with the Roth 401k there is a 19.5k limit whereas IRA it’s 6k. Any recommendations? TIA.

Gross: 51k income
12% into Roth 401k 8% Trad 401k

#2

Gilberto,

There are two considerations for you to think about.

  1. You can only contribute to Roth IRA when your Modified Adjusted Gross Income is below $139,000 (for 2020). You can contribute to Roth 401k regardless of income level.

  2. Required Minimum Distributions are applicable to 401k accounts, and it is not applicable to Roth IRA. Under the current regulations, you need to withdraw from your 401k account starting at age 72. The minimum withdrawal amount is determine by the total 401k balance and divided by your expected mortality factor at that time. The older you are, your mortality factor will decrease, if you have a bigger account balance, then your Required Minimum Distributions will be a big amount. Plan to see if you’ll be ok with the required distributions and tax implications.

Considering those 2 factors, I would recommend contributing to 401k to get the match, then next is maxing out Roth IRA, then whatever else you can afford contribute that to 401k (pretax or roth - your pick).

#3

Just thought of a third consideration point.

  • Roth IRA, you can withdraw your contributions at any time if you need the money. 401k can provide loans to you, but if you don’t pay your 401k account back in time, you’ll be penalized in addition to having to pay any applicable taxes.