By Sabrina Karl

Though only 25 years old, Roth IRAs have become a fairly well known retirement vehicle. But many Americans have access to a newer version, the Roth 401(k), and it can be confusing how the two differ.

The basic premise of any Roth account is that funds you contribute have already been taxed, meaning you will not be taxed again when you withdraw the funds. This is in contrast to traditional IRAs, which provide their tax break at the time of contribution and then require taxes be paid on the withdrawals.

Where Roth IRAs and Roth 401(k)s vary is that the 401(k) version is offered in employee retirement plans, typically alongside a traditional 401(k) option. As such, these accounts are funded directly from your paycheck, and may also trigger a match of additional funds from your employer.

In contrast, a Roth IRA is set up by individuals on their own, through a brokerage firm. This makes them accessible to anyone with earned income, even if they are self-employed or their employer doesn’t offer a retirement plan.

For those with access to a workplace Roth 401(k), a big advantage is that much larger annual contributions can be made than with individual Roth IRAs, and there are no income limits on eligibility to contribute, meaning high-earners that might not qualify for an individual Roth can still make Roth investments.

However, there are trade-offs. A Roth 401(k) must be invested in the workplace plan’s options, which tend to be limited and can carry high expenses and fees. An individual Roth, however, can be invested in almost any existing security, including ultra-low fee index funds.

In addition, a Roth 401(k) mandates Required Minimum Distributions (RMDs) starting at age 72, while individual Roth IRAs can be left untouched indefinitely, including leaving them tax-free to your beneficiaries.