I am very new to finance and I am trying to figure out an answer to a question I have. My employer just started offering a Roth 401k option (in addition to our current 401k). I currently invest 5% of my income in both. My question is, since I am already investing in a Roth 401k, should I also start a Roth IRA or are the basically the same thing? If they are basically the same thing, I would like to contribute my extra money elsewhere (mutual funds, stocks, real estate etc.) if at all possible. If anyone could give me the rundown on these two investments and any advice, I would greatly appreciate. Thanks.

roth 401k is funded by your after tax dollars from your paycheck, which will NOT reduce your tax bite now, but you will NOT have to pay taxes on it when you withdraw.

401k is funded by your pre-tax dollars from your paycheck, which will reduce your tax bite now, but you will have to pay taxes on it when you withdraw.

It comes down to, do you think you will be in a higher tax bracket now or when you retire ?

As for the annual max limit, they are considered one, so you can not contribute more than this year's limit (15,500?) over the two, unless you were over 50 or 55 ? and then the rules allows you to contribute another 5K (catch up rule).

I completely understand my 401k. I think I gave the wrong impression in my initial post. I do NOT want to compare my regular 401k to my roth 401k. I want to compare my roth 401k to a regular roth ira. Here are a couple things I was planning on doing. Let me know what you think is the best and why.

Situation 1: Invest 5% of my income in my 401k, 5% in my roth 401k, and set another 5% aside for my Roth IRA

Situation 2: Invest 5% of my income in my 401k and 10% in my roth 401k and not invest in a Roth IRA at all.

Situation 3: Invest 5% of my income in my 401k, nothing in my roth 401k and 10% of my income in a roth IRA.

No matter what, I plan on investing 5% percent into my regular 401k just in case I am in a lower tax bracket when I retire. Basically I want to know if there is a specific reason I should invest more in my roth IRA or Roth 401k? Please let me know what you think and why. Thanks.

Couple pointers that may help you:

1.For your Roth401k/401k, contribute at least to the employer match. Not sure how that works across different types, so you might want to check it.

2. Going Roth 401k vs 401k depends on your age and future plans. The rule of thumb that I've read is that if you still have a ways to retire, put all your money into the Roth 401k. The tax break when you withdrawal will more than offset any tax deductions you may get with a regular 401k. The only time this may not be true is if you plan to live in a lower tax bracket in the future.

3. Roth IRAs are more flexible, but 401k's build fiscal disciple; the money just goes into the 401k directly, so you can't be tempted to spend it.

My employer is going to start offering the roth 401k starting next year. I currently contribute to my pre-tax 401k. My employer does not do contribution matching, they do a profit sharing contribution once a year instead. Never mind I think I just answered my question myself. I was going to ask if I should go all roth 401k or roth ira. I think I will go max roth ira followed by roth 401k with maybe 5% pre-tax. I am also contributing max to an HSA.

This is interesting - only a handful of employers are offering Roth 401k plans. Bumping topic - and linked to FW Finance IRA/401k FAQ.

Another consideration is protection from creditors.........qualified plans like 401Ks (and I assume Roth401Ks)
have stronger protection than other plans. IRAs have some protection but you have to file successfully for
bankruptcy to qualify. The bankruptcy qualification is not necessary for 401K protection.

i would think a big part of your choice would be your investment options. if you are happy with the plan your employer offers (ie, the funds available), then just use the Roth 401k as there won't be any fees while setting up an individual one will incur fees. I do know some 01k's can be pretty limited in terms of choices, so it may be worthwhile in that regard. lots of things to consider.

kevinkevinkevin said:Who is this Roth guy anyway? I'm thinking it's Eli Roth, director of such films as Cabin Fever and Hostel.

The Roth IRA is named after William Roth, a former Republican Senator from Delaware and Chairman of the Senate Finance Committee.

CreditGuy said:Correct me if I'm wrong, but my understanding is that there is NOT a 10% penalty on unqualified withdrawals from a Roth 401k. The 10% penalty is only on the portion of the withdrawal that represents profit. You've already paid taxes on the contribution.Correct.
In other words, suppose you put $12K into the Roth 401k and it's now worth $15K. You get a fully qualified distribution after age 59.5 AND if the Roth has been set up for at least 5 years (counting from Jan 1 of the year in which it was set up). If EITHER of those things are not so, you have an unqualified distribution.Correct, except you don't need to be 59 1/2 if you're dead or disabled.
Suppose you're under 59.5 and take out $7500. $6000 represents the portion that's your initial contribution, and that portion is tax free. The 10% penalty is assessed on the remaining $1500 only, and you pay regular income taxes on that remaining $1500 as well. You pay based on the market value at time of distribution, regardless of whether the profit has been realized or not.

Experts--right or wrong?Right. But note that this is still a 401(k) plan, so you can't just take a withdrawal whenever you want while you're still employed -- unless you're over 59 1/2, dead or disabled. Other that that, unless your employer terminates the plan and doesn't replace it, you would need to qualify for a hardship withdrawal.

Now, if you have left the employer (so that you can withdraw whenever you want but don't qualify yet for qualified withdrawals), then you're also free to roll over to a Roth IRA. If you do that, and then take the $6000 out of that IRA, then your entire withdrawal would be a withdrawal of your contribution, and would all be tax- and penalty-free. And you're not just delaying the tax, either, you're eliminating it as long as you can limit your total non-qualified withdrawals to less than your contributions.
And any quick suggestions for setting up a self-employed Roth 401k? I still don't know of any brokerage house that allows that directly, so it looks like I'd have to go through a third party service to handle the paperwork. I'm a self-employed individual proprietor.It has been discussed in the 401(k)/IRA sticky. I believe T. Rowe Price, for one, has their plan up and running.