Can One Have a Roth IRA & 401(k)?

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It's perfectly legal to contribute to both a Roth IRA and a 401(k). A 401(k) can affect your contributions to a traditional individual retirement account, but not to a Roth. If you open both, you'll have to decide which should be the top priority for retirement saving.

Separate Systems

IRAs — traditional and Roth alike — and 401(k) accounts have separate, unrelated limits. At the time of writing, the most you can contribute to an IRA is $5,500, or $6,500 if you're at least 50 years old. If you have multiple IRAs, the limit applies to all the accounts combined. If, say, you put $3,000 in a Roth, you can only put $2,500 in a second Roth account, for instance.

A 401(k) allows you to contribute more — $18,000 a year, as of 2015, plus $6,000 extra once you turn 50. The government periodically raises the limits to keep pace with the rising cost of living.

Gross Income Restrictions

An added limit on Roth contributions is based on your modified adjusted gross income, or MAGI. Internal Revenue Service Publication 590 has a worksheet for figuring your MAGI. It's equal to your adjusted gross income — something you calculate on the front page of IRS Form 1040 — after you add back certain write-offs, such as the deductions for tuition, student loan interest and traditional IRA contributions. Suppose a married couple filing a joint return has a MAGI of $183,000 or more. Their ability to contribute to their Roth accounts is reduced as their income rises; at $193,000, they can no longer make Roth contributions.

Tip

  • If you make too much to contribute to a Roth, you can place the money in a traditional IRA, then convert it to a Roth account. There's no income restriction that prevents this. However you will have to pay tax on the IRA assets when you convert them, just as you do with any Roth contributions. Whether this is a smart move depends on many things, including how much tax you'll pay and how long you can wait before withdrawing from the Roth.

High income doesn't limit 401(k) contributions. However, if highly paid employees at a company contribute much more to the 401(k) plan than other workers do, the IRS can penalize the employer. This gives companies an incentive to enroll lots of lower-paid employees.

Investing Strategy

You make 401(k) contributions pre-tax, which reduces your taxable income. Roth contributions are taxable, but when you start making withdrawals, they're tax free.If you can't afford to fund both accounts to the limit, Money magazine recommends a strategy:

• If your company matches your 401(k) contributions, put money into your 401(k) until you get the maximum possible matching funds.

• After you've maxed out the match, contribute to your Roth IRA up to the maximum for the year.

• When you've made the largest possible contribution to the Roth, resume contributing to your 401(k) until you've maxed that out too.

Your individual tax situation and your other investments may make a different strategy work better for you.

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