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A Roth deferral is money that a person puts in a Roth investment account to save for later in life, usually retirement. There are two types of Roth accounts: a standard Roth Individual Retirement Account, or IRA, and a Roth 401(k). Payments to either account must be made with post-tax dollars. The deferral is in the enjoyment: when participants withdraw, they do so tax-free.
All Roth accounts are facets of United States tax law and typically are only available in the U.S. or to U.S. citizens working abroad. The distinguishing feature of the Roth is that it is wholly funded with after-tax money. Workers receive their paycheck, pay the necessary income taxes, then choose to allocate some of the remainder to a qualifying account. This usually results in a deferral of that money for a later time, the specifics of which are usually set out by the plan.
There are several key differences between Roth IRA and 401(k) plans, but a Roth deferral happens under either one. The main idea behind a deferral is to save money in a growth account that can be used later in life without incurring a tax penalty. Money is usually invested in stocks, bonds, and mutual funds while in the account. Over time, the hope is that that money will grow in size and return on the initial principal. That growth is not usually taxed, which is why the accounts are so beneficial.
Investors are usually limited in terms of how much money they can defer and grow through a traditional Roth IRA. There are also usually income limits, such that people making over a certain annual salary are not eligible to participate. Money invested in this sort of Roth deferral account cannot usually be accessed before the investor has reached retirement age, either, though in most cases,it need not ever be distributed. Deferring money into this sort of account is often a means of transferring wealth and assets from one generation to the next. Once the account is eligible to be disbursed, the financial deferral can pass to anyone for use at any time.
The same is not usually true when it comes to Roth 401(k) accounts. This sort of Roth deferral is typically offered by and administrated by corporations for the benefit of qualifying employees. Deferral payments are usually made through direct paycheck deduction, and almost anyone is eligible to participate, regardless of how much money they make. There are still usually caps limiting annual deferral to a certain amount, but in most cases more can be contributed to a 401(k) deferral account than to an IRA in a given year.
Choosing the best Roth deferral is usually a matter of circumstance and careful financial analysis. Roth 401(k) plans can often hold more money, which makes higher returns more likely. The choices of investment vehicle are usually limited by the sponsoring corporation, however. Distribution is usually mandatory once the investor reaches a certain age, as well. It is sometimes possible to roll over a 401(k)-style plan into one that does not have a mandatory vest date, but not always.