If you have been a diligent saver, you may be entering retirement with both a Roth IRA and a Roth 401(k). Both accounts hold after-tax money. Both grow tax-free. Both allow tax-free withdrawals in retirement. So they are basically the same thing, right?
Not quite. The rules governing these two accounts differ in ways that matter for retirement planning, and understanding those differences can help you make smarter decisions about which account to tap first.
The Key Differences
Required Minimum Distributions (RMDs): Roth IRAs are not subject to RMDs during the account owner's lifetime. You can leave the money in the account indefinitely, letting it continue to grow tax-free, and pass it to your heirs. The SECURE 2.0 Act (passed in 2022) eliminated RMDs for Roth 401(k)s starting in 2024, so this distinction has largely been eliminated for new retirees.
The Five-Year Rule: Both Roth IRAs and Roth 401(k)s have a five-year rule, but they work differently. For Roth IRAs, the five-year clock starts from the first year you made a Roth IRA contribution (or conversion) and is per taxpayer, not per account. For Roth 401(k)s, the five-year rule is per plan. If you roll your Roth 401(k) into a Roth IRA, the older of the two five-year clocks applies.
Investment Options: Roth IRAs typically offer a much broader range of investment options than employer-sponsored Roth 401(k)s. If your 401(k) plan has limited or high-cost investment options, rolling it to a Roth IRA in retirement may improve your investment flexibility and reduce costs.
Which to Draw From First?
The general guidance for most retirees is to draw from the Roth 401(k) first (or roll it to a Roth IRA). Since the Roth IRA has no RMDs and can continue growing tax-free indefinitely, it is the most powerful long-term asset in your portfolio. Preserving it as long as possible maximizes the tax-free compounding and the tax-free inheritance for your heirs.
However, this is not always the right answer. If you need income in the first few years of retirement and your Roth IRA five-year clock has not yet run, drawing from the Roth 401(k) may be preferable to avoid potential penalties.
The Roth IRA as a Legacy Asset
For clients who do not need their Roth IRA for living expenses, I often encourage them to think of it as a legacy asset rather than a retirement income source. The Roth IRA can be passed to heirs who then have 10 years to draw it down tax-free (under the SECURE Act rules for non-spouse beneficiaries).
For a child in their peak earning years, inheriting a Roth IRA rather than a traditional IRA can be worth significantly more in after-tax terms. The inherited Roth IRA distributions are tax-free; inherited traditional IRA distributions are taxable at the beneficiary's marginal rate.
The Bottom Line
Roth accounts are among the most valuable assets in a retirement portfolio, precisely because of their tax-free status. But not all Roth accounts are created equal, and the sequencing decisions you make in retirement can meaningfully affect both your lifetime income and your legacy.
Book a complimentary retirement brainstorm session and let's make sure your Roth strategy is optimized for your situation.
Jason Rindskopf is the founder of Two Waters Wealth Management and creator of the SMART Retirement Blueprint®. He works with high-achieving professionals and couples in the Charlotte, NC area who are within 10 years of retirement or recently retired.