Opening and Contributing to Both 401(k) And Roth IRA

Written by True Tamplin, BSc, CEPF® | Reviewed by Editorial Team

Updated on January 04, 2023

It is possible to open and utilize both 401(k) and Roth IRA at the same time.

Before understanding how to manage both a 401(k) and Roth IRA, it is helpful to understand the features of a 401(k) and a Roth IRA.

What Is a 401(k)? 

A 401(k) is a type of retirement savings plan which allows employees to save for retirement on a tax-deferred basis.

Generally, the maximum contribution limit an employee can contribute to his own 401(k) account is $18,000 annually.

Employers are allowed to match 50 percent or 100 percent of their employees' contributions up to $18,000 annually.  This means that if an employee contributed $10,000 into his own 401(k), then the company would then contribute another $5,000 at the most.

It is important to note that this doesn't mean employers always match 100 percent of their employees' contributions. For example, say an employee contributes $5,000 into his 401(k) account and the company matches 50 percent of his contribution up to $2,500.

What Is a Roth IRA?

A Roth IRA is an individual retirement account that allows individuals to save for retirement on a tax-deferred basis. Individuals who are interested in the Roth IRA are not taxed at the time of deposit but are later taxed upon withdrawal.

The primary benefit of a Roth IRA is that your account grows tax-free until you withdraw the money. The main difference between a Roth IRA and a 401(k) is that contributions to a Roth IRA are made on an after-tax basis, while contributions to 401(k) plans are pre-tax (you don't pay taxes now). Additionally, contributions to a Roth IRA are not limited by your entire income like the 401(k) plan. 

For example, if your earned income is $75,000 and you choose to contribute $18,000 of that income into your 401(k), then the employer would match 50 percent of the contribution up to $18,000. If your earned income is too high to allow you to contribute the maximum amount allowed into your 401(k), then you are not eligible for a Roth IRA at all.   

Maximizing Both Roth IRA and 401(k)

In order to maximize the benefits of both a 401(k) and a Roth IRA, contributions should be made at least to the extent that all applicable contribution limits are satisfied. For example, if an individual has a 401(k) plan with his employer where he could contribute up to $18,000 ($24,000 if 50 percent match is available) and he is also eligible to contribute up to $5,500 ($6,500 if age 50 or over) into a Roth IRA if his income falls below certain limits, then he should make at least the maximum 401(k) contribution. Doing so allows him to contribute $23,500 ($18,000+$5,500) to retirement accounts in the same year. 

If he contributes $24,000 into his 401(k), then he can only contribute $3,500 (the contribution limit for Roth IRA is $5,500 if age 50 or over) into a Roth IRA. This individual should also note that even though traditional and Roth IRAs have different contribution limits, this does not mean he can contribute $5,500 to his Roth IRA and $5,000 to his 401(k). 

Contributions are made on an individual basis. Therefore, if he contributed $24,000 into his 401(k), the most he could contribute into his Roth IRA is $500 ($5,500-$24,000). This means that if he were to contribute the entire 401(k) contribution limit of $18,000 into his traditional IRA, then it would reduce his ability to contribute enough money into the Roth IRA to meet its annual contribution limits.

The Bottom Line

Both a 401(k) and a Roth IRA can be great retirement planning tools. 

However, in order to maximize the benefits of both plans, individuals should understand how they work and how much to save into each account if their income is high enough for them to have access to both accounts.

In order to do this, it may be helpful to work with a financial advisor who can help an individual understand his/her options and develop a comprehensive retirement savings strategy that is best suited for their particular needs.

 

Opening and Contributing to Both 401(k) And Roth IRA FAQs

What are the advantages of a Roth IRA over a traditional IRA?

The primary advantage of a Roth IRA is that its funds can be withdrawn tax-free later in life. This differs from the traditional IRA, where contributions are tax-deductible upfront, but any withdrawals are taxed at ordinary income rates.

Can I contribute to both my Roth IRA and a 401(k) plan?

A person can contribute to both a Roth IRA and an employer-sponsored 401 (k).

Can I make withdrawals from my Roth IRA before age 59½ without penalty?

Withdrawals on earnings can be made at any time. Pre-59 ½ penalties do not apply to this account.

Can I contribute to both a traditional IRA and a Roth IRA?

No, you can only have one type of IRA at a time.

What is deemed qualified withdrawal?

A qualified withdrawal includes any funds being withdrawn from your account for reasons including, but not limited to, purchasing your first home, higher education expenses for yourself or a dependent, disability, or death.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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