Brief outline of Roth IRA compared to Roth option in 401(k).
The big difference is a higher contribution limit into the Roth 401(k) account compared to a Roth IRA. As of 2011, you can contribute up to $16,500, (over age 50 – $22,000, annually), with no earnings limit like in the Roth IRA. (High wage earners have not been able to make Roth IRA contributions.)
After tax contribution of $16,500, (or up to $22,000 if over age 50), grow tax differed with earnings distributed tax free. If you can afford 5% of your earnings to be contributed after tax, and grow with tax free distributions at retirement, look at the Roth option in an IRA or 401(k). Use any financial calculator to see how $16,500 can grow over time. See how $165 a month can make a huge difference as well.
If you earn too much to contribute to a Roth IRA, consider contributing substantial money into a Roth 401(k) account that offers tax free growth and tax free distribution. If you are a sole employee open a Solo(k) and take advantage of the higher contribution limits regardless of your income.
Build this account, we will talk about flexibility in distribution or as an estate planning tool in a later clip.