Originally Posted by medford
the roth is similar to any regular investment account in terms of what options you have to invest (bonds, stocks, mutual funds, etc..) All money is taxed upfront (where a 401(k) is all pre-tax investments) then your money is free to grow tax-free until retirement.
I've hesitated posting in this thread for a year now. I work in the industry.
I'll clarify here since it's not that simple, but generally speaking you are correct.
First, a 401 (K) can include post-tax investments. Many companies have instituted the option for a ROTH designated account inside of their 401 K chassis. Thus your contributions can be much larger than outside of that chassis. If your under 50 like myself, you can put up to 17,500 in your 401 (K) in the ROTH designated account. Personally, I utilize this account because I feel tax rates will be higher when I'm able to withdraw after 59 1/2 without a 10% penalty. The downside is I do not get to defer that 17,500 from my income taxes.
At retirement or upon job loss, I'll be able to roll the ROTH portion of my account out into a ROTH IRA just like the traditional rollovers. By doing this, I maximize the features of the ROTH because I can put a heck of a lot more money away than ROTH's outside of the 401 K chassis. (5,500 for under 50 years old and 6,500 for those over 50)
Secondly, the money from a ROTH is tax free in retirement, but you still must be over 59 1/2 to avoid the 10% penalty. Also, you must hold "A ROTH" for at least 5 years and be over 59 1/2 to get tax free withdraws. Your cost basis (money contributed) will never again be taxable, but your investment gains will be. You can also always peel out your cost basis before 59 1/2 so long as its coded that way. Finally, the 5 year rule is subject to ROTH IRA's in general. Thus, if you have multiple ROTH accounts with various companies each does not have to serve the 5 year rule. The first day you open a ROTH account the clock starts ticking and you don't have to subsequently serve the 5 year's if you were to open a new ROTH account with another company.