By LouAnn Schulfer, AWMA®, AIF®
Roth IRAs, named for the late Senator William Roth (Delaware), became an option for retirement savings in 1998. In 2006, Roth options began to be allowed by the IRS in Designated Roth Accounts within company plans such as 401(k)s. While both options offer similar tax deferral and tax-free withdrawals when their respective rules are followed, there are significant differences in participation and regulation. Here are just a few.

Investment Choices. You have a tremendous amount options and flexibility as a Roth IRA owner as long as the investment is not considered prohibited by the IRS, while in a company plan, your choices are limited to the offerings in the plan. Contribution limits. With Roth IRAs, you may contribute no more than $6,000 (2021) or $7,000 if over age 50 (2021) as long as your Adjusted Gross Income falls under limits published by the IRS, depending upon your tax filing status. AGI does not affect your ability to contribute in a company plan, where the IRS maximum contribution limits are $19,500 (2021) or $26,000 if over age 50 (2021).

However, one may wish to assess their individual situation when in a high tax bracket to determine whether it makes sense to contribute to the Roth option versus contributing pre-tax money. Required Minimum Distributions only come into play upon the Roth IRA owner’s death, while designated Roth accounts in company plans are subject to ordinary RMD rules. If you must take a Non-Qualified Distribution, it is friendlier to do so in a Roth IRA where the order is non-taxable contributions before taxable earnings. From a company plan, non-qualified distributions are pro-rated between contributions (non-taxable) and earnings (taxable).

Getting money in can be the easy part. Complications, confusion or simply not knowing the rules may impact getting your money out. While they share Roth in name, there are differences to be aware of between Roth IRAs and Designated Roth Accounts.

LouAnn Schulfer is co-owner of Schulfer & Associates, LLC Wealth Management and can be reached at (715) 343-9600 or [email protected] www.SchulferAndAssociates.com.
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.