It may not be Roe v. Wade or Brown v. Board of Education but Roth v. Roth is bound to make history.  Hyperbole you say?  Of course it is.  You try making finance interesting!

By now we’re familiar with how our 401(k) plans operate and much has been written about the pros/cons of Traditional v. Roth IRAs but the advent of the Roth 401(k) has brought an entirely new level of complexity. This hybrid account encompassing features of both a Traditional 401(k) and a Roth IRA blurs the lines and creates much confusion. Let’s try to clear it up:

CONTRIBUTION AMOUNTS
The Roth 401(k) offers a higher contribution amount – $16,500/yr with an extra $5,500/yr if you’re age 50+. The Roth IRA contribution limit maxes out at $5,000/yr with an extra $1,000 for those ages 50 and older.

DISTRIBUTIONS
The Roth 401(k) is subject to the Required Minimum Distribution (“RMD”) rules meaning the withdrawals must begin no later than age 70 ½. Conversely Roth IRAs can essentially exist forever as RMDs are not applicable. The loophole?…rollover a Roth 401(k) to a Roth IRA and the RMD issue goes away.

COMPANY MATCH
When our employers provide matching 401(k) contributions they are funded with pre-tax dollars. Roth 401(k)s by design are funded with post-tax dollars. The solution is a “dual 401(k)” where employers maintain a pre-tax account to receive the company’s matching contributions and a post-tax account funded with Roth contributions.

INVESTMENT OPTIONS
The Roth 401(k) limits investment options to those provided by the plan. The Roth IRA has a much wider variety of investment choices. Essentially any financial asset (e.g. stock, bond, mutual fund, CD) or tangible asset (e.g. real estate) is available as an investment option within an IRA.

INCOME LIMITATIONS
The Roth 401(k) is available to any employee (assuming the employer offers this type of benefit program). The Roth IRA is available to anyone who wishes to convert his or her Traditional IRA now that the $100,000 Adjusted Gross Income (“AGI”) limitation is no more. Contributions to a Roth IRA, however, remain subject to income limitations. In 2011 joint filers with AGI less than $179,000 may make a full or partially phased out contribution. For single filers the AGI limitation for a fully phased out contribution is $122,000.