Can I Put Money Into a Roth IRA if I Have a 401(k) at Work?
There are many ways to save for retirement. Some retirement accounts offer tax advantages. Both the Roth IRA and 401(k) plans offer significant tax savings. However, there are rules and regulations limiting how such accounts may be used and who can contribute to them. Understanding these limits allows the taxpayer to maximize the benefits of both accounts.
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Types
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Both Roth IRAs and 401(k)s are tax-advantaged retirement savings accounts. However, 401(k) plans may only be offered by employers. Roth IRAs are individual accounts. Therefore, a person may contribute personally to a Roth IRA regardless of whether they have a 401(k) at work.
Benefits
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Both Roth IRAs and 401(k)s offer tax-deferred growth on all investments inside them. In addition, 401(k) plans allow contributions to be made with pre-tax dollars, reducing the taxpayer's income. Roth IRA funds may be withdrawn after age 59 1/2 tax-free.
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Considerations
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Both 401(k) accounts and Roth IRA accounts have rules that limit how much money can be contributed each year. Contributions to a Roth IRA are limited to $5,000 per year for each taxpayer. Those over 50 years old may make an additional catch-up contribution of $1,000 per year. Contributions to a 401(k) are limited to $16,500 per year. Taxpayers over age 50 may make a catch-up contribution of up to $5,500 each year to their 401(k) plan.
Misconceptions
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While both 401(k)s and IRAs have contribution limits, the limits are not linked. A taxpayer may contribute the maximum annual amounts to both a 401(k) and an IRA each year. The confusion may stem from the fact that the IRA contribution limit is an overall limit that applies to both traditional and Roth IRAs. In addition, while one factor in determining whether traditional IRA contributions are deductible is whether the taxpayer has a retirement plan offered at work, this does not apply to Roth IRA contributions.
Considerations
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Contributions to a 401(k) offer a significant tax savings in the current tax year. However, all withdrawals from a 401(k) including gains and income are subject to ordinary income taxes. In contrast, a Roth IRA contribution is not deductible, however all non-early withdrawals, including gains and income, are tax-free in retirement. Consider whether the value of the current deduction outweighs the future savings in retirement.
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