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Yes, you can contribute to both a Roth IRA and a 401(k), provided you don’t exceed annual contribution limits for each account.
Determining whether to contribute to a Roth IRA, 401(k), or both can be an important step in planning for your retirement. Here are the key differences, including tax advantages, employer contributions, and investment options.
Eligibility requirements are the first consideration when contributing to a Roth IRA and a 401(k). For Roth IRA contributions, your eligibility is determined by your income. Specifically, if your modified adjusted gross income (MAGI) exceeds certain thresholds, your ability to contribute to a Roth IRA may be reduced or eliminated. However, there are no income limits for contributing to a 401(k), making it accessible to anyone with earned income.
IRS rules do allow for contributions to both a Roth IRA and a 401(k), provided you adhere to the annual contribution limits for each account.
This means you can take advantage of the higher contribution limits of a 401(k) while also benefiting from the tax-free growth of a Roth IRA. This dual approach can be a strategy for maximizing your retirement savings. The advantages to contributing to both accounts present some key benefits, such as:
- Tax diversification in retirement, allowing for better management of taxable income.
- Potential reduction of overall tax burden.
- Maximization of savings potential by taking full advantage of the benefits each account offers.3
Balancing contributions between a Roth IRA and a 401(k) requires careful planning. You might start by contributing enough to your 401(k) to receive the full employer match, which is essentially free money, if your employer offers this. Once you’ve secured the match, consider maxing out your Roth IRA contributions, if you’re eligible.
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Filed under: "Ask-an-Advisor", Accounting, CMP Program, curated experts,, Experts Invited, finance, Financial Planning, Funding Basics, Glossary Terms, Portfolio Management, Taxation | Tagged: 401(k), CMP, finance, Investing, IRA, Linqto, MAGI, personal-finance, retirement, retirement planning, Roth, Roth IRA |
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