Should your employer offer a 401(k), you could be able to allocate your funds between a traditional and a Roth 401(k). You can use an individual retirement account (IRA) to save for retirement if you work for yourself or receive freelance work. You can choose between a traditional and a Roth IRA.
The amount of money you can save in each of these tax-advantaged retirement accounts is where there is a significant difference. The figures are adjusted for inflation every year. Whether an IRA or 401(k) is a traditional or Roth account, the contribution limits are the same.
Yes, you can contribute to both a 401(k) and a Roth IRA in the same year, up to the annual contribution limits for each plan. However, there are income limits for Roth IRA contributions, so you may not be able to contribute the full amount if your income is too high.
Here’s a breakdown of the contribution limits for 2024:
401(k):
- Employee contributions: $23,000
- Catch-up contributions (age 50+): $7,500
- Total contributions (including employer contributions): $66,000
Roth IRA:
- Contribution limit: $7,000
- Catch-up contributions (age 50+): $1,000
- Total contributions: $8,000
Income limits for Roth IRA contributions:
- Single, head of household, or married filing separately:
- Less than $146,000: Contribute the full amount
- $146,000 to $160,999: Reduced contributions
- $161,000 or more: Not eligible
- Married filing jointly or qualifying widow(er):
- Less than $230,000: Contribute the full amount
- $230,000 to $239,999: Reduced contributions
- $240,000 or more: Not eligible
Here’s how to determine if you can max out both your 401(k) and Roth IRA in the same year:
- Calculate your modified adjusted gross income (MAGI). This is your adjusted gross income (AGI) minus certain deductions, such as student loan interest and tuition and fees. You can find your AGI on line 11 of your Form 1040.
- Compare your MAGI to the income limits for Roth IRA contributions. If your MAGI is below the limit for your filing status, you can contribute the full amount to a Roth IRA. If your MAGI is above the limit, you cannot contribute to a Roth IRA.
- Contribute to your 401(k) up to the annual contribution limit. If you are eligible to contribute to a Roth IRA, you can also contribute to your 401(k) up to the annual contribution limit.
Here are some additional things to keep in mind:
- You cannot contribute more than the total combined contribution limit for both plans. This means that if you contribute the full $23,000 to your 401(k), you can only contribute $5,000 to your Roth IRA.
- If you are married, your spouse may also be able to contribute to a Roth IRA, even if you cannot. This is known as a “spousal IRA.”
- You can contribute to a Roth IRA even if you are already participating in an employer-sponsored retirement plan. However, your traditional IRA contributions may not be tax deductible, depending on your income and whether an employer retirement plan covers you or your spouse.
Benefits of Maxing Out Your 401(k) and Roth IRA
There are many benefits to maxing out your 401(k) and Roth IRA each year. These include:
- Tax savings: Both 401(k) and Roth IRA contributions are made with pre-tax dollars, which means that you will not have to pay taxes on that money until you withdraw it in retirement.
- Retirement security: The more money you save for retirement, the more secure your financial future will be.
- Compound interest: The money you contribute to your 401(k) and Roth IRA will grow over time thanks to compound interest.
- Employer match: Many employers offer a matching contribution to their employees’ 401(k) plans. This is essentially free money, so it is important to take advantage of it.
Maxing out your 401(k) and Roth IRA each year is a great way to save for retirement. If you are eligible to contribute to both plans, you should aim to do so. By doing so, you will be well on your way to a secure financial future.
Roth IRA
A Roth IRA is a type of qualified retirement plan that is named after Delaware Senator William Roth. It was created by the Taxpayer Relief Act of 1997 and is very similar to a traditional IRA. The biggest distinction between the two is how they’re taxed.
Traditional IRA contributions are typically made with pre-tax money; you typically pay income tax on the money you withdraw from the account after retirement and receive a tax deduction for your contribution.
However, Roth IRAs are funded with after-tax dollars. The contributions are not usually tax-deductible. A Savers Tax Credit of 2010 up to 80% of the contribution could be available to taxpayers with moderate incomes.
However, qualified distributions from a Roth IRA are tax-free once you begin taking money out of the account.
IRAs, whether Roth or traditional, are not available through employers. These are accessible at the majority of banks, brokerages, and other financial institutions and can be opened by any taxpayer who has received income.
Roth 401(k) Contribution Limits
As previously mentioned, the annual contribution caps are modified to account for inflation. The limits for Roth 401(k)s are as follows:
- The 2023 maximum contribution to a Roth 401(k) is $22,500. The catch-up contribution is $7,500.
- The 2024 maximum contribution to a Roth 401(k) is $23,000. The catch-up contribution is $7,500.
proportion of 401(k) plans with a Roth option in 2023, as per a research by Fidelity Investments
Can You Contribute To An IRA and 401(k) In The Same Year?
FAQ
How much can I contribute to my 401k and Roth IRA in same year?
Can I contribute to Roth IRA after maxing out 401k?
Can I max out 401k and IRA in same year?
Can I contribute full $6000 to IRA if I have 401k?
Can I contribute to a Roth IRA and a 401(k) in the same year?
You can contribute to a Roth IRA and a 401 (k) in the same year. The IRS is A-OK with you saving money in both an employer-sponsored retirement plan — a 401 (k) or 403 (b) — and an IRA in the same year, up to the maximum for each type of plan. Roth IRAs don’t have age limits.
Do Roth IRA contributions count toward my 401(k) limit?
No, Roth IRA contributions do not count toward your 401 (k) limit. However, Roth IRA contributions do count toward your total IRA limit. So, if you contribute to both a Roth and a traditional IRA, the combined amounts can’t exceed the annual contribution limit for each.
Should you max out both a 401(k) and an IRA?
Contributing to both types of accounts in the same year can allow you to defer income tax on as much as $25,500 if you are 49 or younger and $33,000 at age 50 or older. The tax benefits of maxing out both a 401 (k) and IRA can be significant.
Is a 401(k) better than an IRA?
A 401 (k) may have a company match contribution, and a 401 (k) may have more limited investment options than an IRA. If you have a 401 (k) or similar retirement plan at work, your eligibility to contribute to an IRA and take a tax deduction depends on your income and which type of IRA you’d like to contribute to — traditional or Roth IRA.