Is there a reason to prefer a Roth IRA over a Roth 401(k)?

[Peter Gulia]

Now that a plan with Roth 401(k) amounts can be amended so after 2023 no during-life minimum distribution is required from those amounts, is there a remaining reason an individual might prefer contributing to a Roth IRA rather than to a Roth 401(k)?

Or is a choice between Roth 401(k) and Roth IRA in equipoise?

Assume the amount the individual can afford to contribute is less than the IRA limit.

Assume investment choices and access to investment advice do not favor an IRA.

[Belgarath]

Tax treatment of distributions? FIFO for the IRA?

[Peter Gulia]

Thank you for noting ordering rules.

If we assume the individual will take no payout until after five years’ Roth-ing and age 59½, does an ordering rule matter?

Anything else?

[Belgarath]

No, I don't think it matters based on that assumption. Of course there may be a possibility of a match in the 401(k). Assuming no match, I'd still vote for maxing out the Roth IRA first - that extra flexibility can be a wonderful thing. When you want available funds for that once-in-a-lifetime opportunity for the cabin on the lake, the ability to access a chunk of money without paying tax on the distribution is a pretty important feature. Just my personal bias - at my advanced age it doesn't make any difference!

[BenefitJack]

In favor of Roth IRA:

The tax qualified plan need not be amended to provide for indefinite deferral.  IRC 401(a)(14) requires a plan to begin payment of benefits no later than the 60 th day after the close of the plan year in which the latest of the following events occurs: (1) The participant reaches the earlier of age 65 or the plan’s normal retirement age, the tenth anniversary of the employee’s participation in the plan, or the participant has a separation of service. Some plans lump sum at this payout date - ignoring the option to defer commencement. 

The tax qualified plan need not be amended to include the up to 10 year rule for distributions to non-spouse beneficiaries. 

There are the IRA exceptions regarding the penalty tax for certain distribution reasons that, I believe, do not apply to hardship or post-separation, pre-retirement distributions from Roth 401k.

In favor of Roth 401(k),

There are the loan provisions,

Involuntary distribution of Roth 401(k) assets don't get stranded in a Roth IRA, invested in capital preservation, as opposed to Roth 401(k) assets transferred directly to a subsequent (or predecessor) employer's 401k plan. 

There may be more, jack 

. 

[MoJo]

Well, at the risk of rehashing the issue of spendthrift protections, I still maintain that a qualified retirement plan has more protection against creditors.  Also, institutional procing of investments (at the cost of limited investment choices.)

[Peter Gulia]

Thank you, all, for helping me list provisions and other factors that point in the different directions.

Mojo, my motivator for thinking about this is an employment-based plan that hates losing participants to IRAs when those resulting investments are much more expensive than, and the investment advice and other services inferior to, those available with the employment-based plan. (The plan, not yet a billion, has purchasing power and negotiation skills few individuals have or practically can use.)

[MoJo]

5 minutes ago, Peter Gulia said:

Thank you, all, for helping me list provisions and other factors that point in the different directions.

Mojo, my motivator for thinking about this is an employment-based plan that hates losing participants to IRAs when those resulting investments are much more expensive than, and the investment advice and other services inferior to, those available with the employment-based plan. (The plan, not yet a billion, has purchasing power and negotiation skills few individuals have or practically can use.)

As an employee of a recordkeeper, I can say the trend is toward facilitating, if not outright encouraging participants to stay in-plan.  Our latest is a decumulation tool (PensionPlus, by Schlomo Bernartzi and company) that provides an analysis of periodic distributions to fund a desired (and likely to succeed over one's lifetime) income level in retirement.  Lots of plan sponsor excitement.  Slow uptake by participants, but growing...

[Belgarath]

5 minutes ago, Peter Gulia said:

(The plan, not yet a billion,

You work in an arena with which I am unfamiliar!