It is possible to maintain a Roth IRA and a 401(k) simultaneously. In addition to being permitted, contributing to both can be a wise retirement savings plan. Nonetheless, there are certain income and contribution caps that govern your ability to make contributions to these kinds of accounts.
If you are eligible, you can benefit from both short- and long-term tax advantages by making contributions to both a Roth IRA and a 401(k). It can be useful to understand how these accounts can combine to increase your retirement nest egg, whether you have already begun saving for retirement or intend to do so soon. Heres what you need to know. Invest Your Money Smarter.
Yes, you can contribute to both a Roth IRA and an employer-sponsored retirement plan, such as a 401(k), Simplified Employee Pension (SEP), or Savings Incentive Match Plan for Employees (SIMPLE) IRA, subject to income limits. However, each type of retirement account has different annual contribution limits.
Why Contribute to Both a Roth IRA and a 401(k)?
There are several reasons why contributing to both a Roth IRA and a 401(k) can be a good strategy:
- Maximize tax savings: 401(k) contributions are pre-tax, meaning they are deducted from your paycheck before taxes are calculated. This can lower your taxable income and save you money on taxes. Roth IRA contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free. This can save you money on taxes in retirement.
- Diversify your investments: 401(k) plans typically offer a limited number of investment options. Roth IRAs allow you to invest in a wider variety of assets, such as stocks, bonds, mutual funds, and ETFs.
- Increase your retirement savings: Contributing to both a Roth IRA and a 401(k) can help you reach your retirement savings goals faster.
How Much Can You Contribute to Each Account?
401(k):
- The annual contribution limit for 2023 is $22,500 for individuals and $30,000 for individuals aged 50 or older.
- Some employers may offer a matching contribution, which can help you save even more for retirement.
Roth IRA:
- The annual contribution limit for 2023 is $6,500 for individuals and $7,500 for individuals aged 50 or older.
- There is no income limit to contribute to a Roth IRA, but there is an income limit to deduct the full contribution from your taxes.
Which Account Should You Contribute to First?
If you can afford to contribute to both a Roth IRA and a 401(k), it is generally best to contribute to your 401(k) first, especially if your employer offers a matching contribution. This is because the matching contribution is essentially free money.
Once you have maximized your 401(k) contributions, you can then start contributing to a Roth IRA.
Other Considerations
- Tax rates: If you believe that tax rates will be higher in the future, you may want to contribute more to a Roth IRA now, since the withdrawals will be tax-free.
- Investment options: If you are not happy with the investment options in your 401(k) plan, you may want to contribute more to a Roth IRA, where you have more control over your investments.
- Retirement goals: How much you need to save for retirement will depend on your individual circumstances. Consider your expected retirement expenses, your current savings, and your other sources of income.
Contributing to both a Roth IRA and a 401(k) can be a good way to maximize your tax savings, diversify your investments, and increase your retirement savings. The best approach for you will depend on your individual circumstances.
Frequently Asked Questions
Q: Can I contribute to a Roth IRA if I already have a 401(k)?
A: Yes, you can contribute to both a Roth IRA and a 401(k).
Q: What is the income limit to contribute to a Roth IRA?
A: The income limit to contribute to a Roth IRA for 2023 is $153,000 for single filers and $228,000 for married couples filing jointly.
Q: What is the annual contribution limit for a Roth IRA?
A: The annual contribution limit for a Roth IRA for 2023 is $6,500 for individuals and $7,500 for individuals aged 50 or older.
Q: How can I open a Roth IRA?
A: You can open a Roth IRA at most banks, brokerage firms, and robo-advisors.
Q: What are the benefits of a Roth IRA?
A: The benefits of a Roth IRA include tax-free withdrawals in retirement, no mandatory withdrawals, and flexible investment options.
Additional Resources
In 2024, your 401(k) plan allows you to make a $23,000 contribution. The maximum annual contribution for those 50 and over increases to $30,500 in 2024.
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Depending on what your employer offers, you may have a 401(k) and a Roth IRA in addition to another kind of employer-sponsored plan like a Simplified Employee Pension (SEP) or Savings Incentive Match Plan for Employees (SIMPLE) IRA. However, each account has a different annual contribution cap.
This page’s investment information is solely meant to be educational. NerdWallet, Inc. does not recommend or advise investors to purchase or sell specific stocks, securities, or other investments, nor does it provide advisory or brokerage services.
Congratulations! You’re well on your way to a successful retirement if you can maximize both plans.
Benefits of Contributing to Both a 401(k) and Roth IRA
Making contributions to both a Roth IRA and a 401(k) enables you to take advantage of tax benefits and optimize your retirement savings. Contributions to a 401(k) account are made with pre-tax money. Additionally, your employer might match contributions up to a predetermined percentage of your yearly salary.
Contributions to your Roth IRA are made after taxes have been paid, but qualified withdrawals, or distributions, are tax-free. Furthermore, making deposits into these accounts may qualify you for a tax credit called the Savers Credit, which may exceed 100% of your contributions. You can stack tax benefits and save for retirement when you combine these accounts.