Can I Contribute the Maximum to Both a 401(k) and a Roth IRA?
Roth individual retirement accounts and 401k retirement savings plans share a common purpose: to encourage people to save for retirement. Employers sponsor 401k plans, while individuals administer their own Roth IRAs. In most cases, the maximum contribution to a 401k has no effect on the maximum contribution to a Roth IRA, and vice versa. However, you need to adopt a strategy to ensure you maximize your total retirement contributions.
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Initial 401k Contribution
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Contribute at least the minimal amount to your 401k that ensures a full matching contribution from your employer. Employers often offer matching contributions to employee 401k accounts. Research the plan at your workplace to determine the requirements for receiving employer matching contributions.
IRA Contribution
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Contribute the maximum amount allowed to your Roth IRA for your income level. Roth IRAs impose income limits on contributors--they are different for individuals and couples. These limits have floor and ceiling amounts which define a phase-out range. If your income is below the limit floor, you can contribute the full amount allowed for your age. You are allowed a pro-rated contribution if your income falls within the phase-out range. If your annual income exceeds the limit ceiling, you cannot contribute to your Roth IRA that year.
If you also have a traditional IRA, fund it up to the maximum amount. The maximum amount is reduced by whatever you contribute to your Roth IRA.
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Maximum 401k Contribution
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Contribute the remaining allowable amount to your 401k. You have now maxed-out your Roth IRA, your 401k and if applicable, your traditional IRA. You can plan to further increase the size of your Roth IRA by converting your traditional IRA to a Roth.
Considerations
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Limits on income and contributions can change every year. Make sure to check the latest version Internal Revenue Service Publication 590 for current information. Thrifty people with modest incomes who contribute to both a 401k and an IRA may be eligible for a Retirement Savings Contribution Credit on their taxes. IRS Publication 590 has the details. Remember that people age 50 or older can make additional contributions to an IRA. In 2010, the amount of this so-called "catch-up contribution" was $3,000, subject to income limits.
Warning
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Carefully calculate your modified adjusted gross income (MAGI) before you contribute to your Roth IRA. Your MAGI determines how much you can contribute to your Roth IRA. IRS Publication 590 describes the calculation in detail.
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