In many cases, a Roth IRA may be a better option than a 401 (k) retirement plan, as it offers more investment options and greater tax benefits. It can be especially useful if you think you'll find yourself in a higher tax bracket later on. With a traditional 401 (k) plan, you pay income taxes on any contribution or profit you withdraw. With a Roth 401 (k), income taxes only apply to your earnings, since you've already prepaid the money you put into the account.
The 10% early withdrawal penalty from the IRS still applies to both plans. Choosing a Roth 401 (k) or a traditional 401 (k) may not be an either-or decision. If your employer offers both options, you can contribute to a Roth 401 (k) and a traditional 401 (k). Your employer can also match both options, but the funds from your traditional 401 (k) plan go directly to your account, while with a Roth 401 (k) plan, they are deposited in a separate tax-deferred account.
If the participant has an established Roth IRA, the qualification period is calculated from the initial deposit in the IRA and the reinvestment will be entitled to tax-free withdrawals when that five-year period ends (and the age requirement has been met).