Can You Have a Roth IRA & 401(k) Plan?

It's wise to save as much for your retirement as your monthly budget allows. One good way to do so is to have a 401(k) plan and a Roth IRA, which are tax-advantaged accounts. There are no Internal Revenue Service rules against having both, and many financial planners recommend doing so as a way to maximize your retirement savings.

  1. Differences

    • The main difference between a 401(k) plan and a Roth IRA is the time at which the money is taxed. In a 401(k), which is offered through your employer, your contributions are made with "pretax" dollars. In other words, your contribution is subtracted from your paycheck before taxes are calculated. With a Roth IRA, which you can set up on your own, contributions are made with "post-tax" dollars, or money on which you've already paid income tax.

    Roth IRA Benefits

    • The primary benefit with a Roth IRA account is that your money grows tax-free. When you reach retirement and begin taking distributions, your withdrawals are not taxable, provided you meet certain criteria. This rule applies to the interest earned on the account, not your contributions, since you've already paid tax on that money.

    Contribution Thresholds

    • Having investment money grow tax-free makes a Roth IRA very attractive, but there are annual contribution limits. You can contribute up to $5,000 to your Roth regardless of your 401(k) contributions. If you're over 50, you can contribute an additional $1,000. Your adjusted gross income may reduce your maximum contribution. IRS Publication 590 (see Resource) explains this in greater detail.

    401(k) Benefits

    • Many companies offer matching contributions to their employees' 401(k) plans. It's wise to take full advantage of this benefit. For example, your employer might match 50 percent of your annual contribution. If you contribute $2,000 annually, your employer's match provides $1,000 worth of "free" money. Tenure is usually a factor in gaining access to these funds. Also, if you leave a company, you can roll over your 401(k) money into your new company's 401(k) plan or into an IRA.

    Considerations

    • Even if there is no company match, a 401(k) plan is a wise investment choice for retirement. As company pensions become a rarity, saving sufficient money for your retirement has become critical. Having both a 401(k) and a Roth IRA is sound planning.

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