Roth IRA & 401k Limits

The Internal Revenue Service grants taxpayers benefits for saving money with qualified retirement plans, such as Roth individual retirement accounts and 401k plans. Roth IRAs offer after-tax savings while 401k plans offer pretax savings. However, the IRS puts limits on who can participate, how much can be contributed and how long the money can remain in the account.

  1. Eligibility Requirements

    • To be eligible to contribute to a Roth IRA, you have to have a modified adjusted gross income (MAGI) lower than the IRS limits. The IRS has different limits for different filing statuses, and adjusts the limits each year for inflation. If your MAGI exceeds these limits, you cannot participate in a Roth IRA. For a 401k plan, you can only contribute when you work for a company that sponsors a 401k plan.

    Personal Contribution Limits

    • Both Roth IRAs and 401k plans restrict the amount of money that you can personally add to the account each year. The limits adjust with inflation, but 401k plan limits greatly exceed Roth IRA limits. For Roth IRAs, you can only contribute $5,000 ($6,000 if you are 50 or older) as of 2011. With a 401k plan, as of 2011 you can put in $16,500 ($22,000 if you are 50 or older). For both Roth IRAs and 401k plans, you must have earned income equal to or greater than your contribution amount.

    Employer Contribution Limits

    • Roth IRA plans cannot accept employer contributions on your behalf. However, 401k plans do permit your employer to put money in the account on your behalf, either through automatic contributions or as a matching amount for your contribution. The combination of your contributions plus your employer's contribution to your 401k plan cannot exceed $49,000 as of 2011. In addition, your employer cannot contribute more to your 401k plan than your annual compensation.

    Limits on Leaving Money in the Account

    • Roth IRAs place no limits on how long the money can remain in the account while you are alive because they do not require minimum required distributions. Conversely, 401k plans force you to start taking money out in the year that you turn 70 1/2 or that you retire, whichever year is later. However, if you own at least 5 percent of the company that you have a 401k plan with, you must start taking distributions in the year that you turn 70 1/2 even if you are still working.

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