Key points
- Funding a Roth IRA and traditional 401(k) can help you maximize your contributions.
- Traditional 401(k)s and Roth IRAs have opposite tax benefits.
- Contributing to both accounts can reduce your taxable income now and provide tax savings later.
The federal government created a variety of tax-advantaged accounts to encourage workers to save for retirement. Two of the most popular are 401(k)s and Roth IRAs.
A 401(k) is an employer-sponsored plan with high contribution limits. Many employers match employee contributions up to a certain percentage of salary. A Roth IRA, on the other hand, is opened by an individual. It has lower contribution limits but offers more flexibility and unique tax advantages.
As you consider which retirement plan to use, remember that it doesn’t have to be an either-or decision. You may be able to fund two or more accounts, maximizing your contributions and diversifying your tax benefits.
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Can you contribute to a Roth IRA and a 401(k) in the same tax year?
You can contribute to a Roth IRA and 401(k) in the same year if you heed the income and contribution limits.
“Not only can you contribute to both a Roth IRA and a 401(k), but you should,” said Chelsea Barrows, a certified financial planner and the senior lead planner at Facet. “By leveraging both types of retirement accounts, you get the best of both worlds from a tax perspective.”
You can use a variety of strategies to contribute to both a Roth IRA and 401(k) and maximize their benefits. We’ll explain those strategies and benefits in later sections.
How much can you contribute to a 401(k) and Roth IRA?
401(k)s and Roth IRAs have different contribution limits. You can combine the two to maximize your retirement savings.
Employees under age 50 can contribute up to $23,000 to a 401(k) in 2024. The general limit on combined employee and employer contributions is $69,000. Savers 50 or older can contribute an additional $7,500, increasing the total limit to $76,500.
The Roth IRA contribution limits are considerably lower. You can contribute up to $7,000 in 2024, or $8,000 if you’re 50 or older.
Unlike 401(k)s, Roth IRAs have income limits. The table below shows how much you can contribute based on your income.
Roth IRA income limits
If you’re under age 50 and your income allows you to contribute to a Roth IRA, you can contribute a combined $30,000 between your 401(k) and Roth IRA.
Tip: Remember that the $7,000 contribution limit applies to all your IRAs combined.
Tax considerations for 401(k)s and Roth IRAs
Another reason you may want to contribute to both a 401(k) and a Roth IRA is to diversify your tax benefits.
Traditional 401(k) contributions are made pretax. Your employer generally deducts them from your paycheck before income taxes have been withheld, meaning you don’t pay taxes on those dollars. This reduces your tax liability for the year. The money in your 401(k) grows tax-deferred during your working years and is subject to income taxes in retirement.
Roth IRA contributions, on the other hand, are made after tax. They don’t reduce your taxable income or tax liability for the current year. But Roth IRAs offer tax-free growth and tax-free withdrawals during retirement if certain conditions are met.
Choosing between a 401(k) and Roth IRA often comes down to which tax advantage works for you. A traditional 401(k) may be the better choice if you want to reduce your taxable income today or expect your tax rate to be lower in retirement. A Roth IRA is best suited for people who think they will be in a higher tax bracket when they start taking withdrawals.
But remember that you don’t necessarily have to pick one or the other.
“Since we don’t have a crystal ball to show us what future tax brackets will be, leveraging both types of accounts is a great hedging of bets,” Barrows said.
Benefits of contributing to both a Roth IRA and 401(k)
As mentioned, you don’t have to choose between a 401(k) and a Roth IRA. You can contribute to both. In fact, many financial experts recommend doing so.
“Having options is extremely valuable. So typically a combination of pretax and Roth contributions makes sense,” said Kendall Meade, a CFP at SoFi. “That way, you experience some tax savings now but also have flexibility to create tax-efficient withdrawal strategies in the future.”
Contributing to a traditional 401(k) reduces your tax liability in the current year. By also contributing to a Roth IRA, which offers tax-free withdrawals during retirement, you can diversify your tax benefits.
Suppose you plan to withdraw $75,000 per year during retirement. If you invest in only a traditional 401(k), all your withdrawals will be subject to income taxes. But if you also invest in a Roth IRA, you can withdraw funds from both accounts. The portion you withdraw from your 401(k) will be taxed, while the portion you withdraw from your Roth IRA won’t.
Tips to maximize your retirement savings with both accounts
It’s easy to understand how contributing to both a 401(k) and a Roth IRA can help you maximize your retirement savings and tax benefits. But what’s the best way to go about it?
First, financial experts generally recommend that you contribute at least enough to your 401(k) to get your full employer match.
“Everyone should contribute enough to their 401(k) to maximize their employer match because that is essentially free money,” Meade said.
According to Vanguard’s 2023 How America Saves report, the most frequently used match formula is 50% on the first 6% of pay. So if your income is $100,000, you may have to contribute $6,000 to get your full employer match.
Next, Meade recommended building a strong financial safety net, including creating an emergency fund and paying off high-interest debt.
“Assuming those items are taken care of, a good starting point for retirement savings is 15% to 20% of your income,” Meade said. “If you started saving later in life, earn a high income or want to retire early, that baseline will be higher.”
When you’re ready to focus on increasing your retirement savings, choose a strategy that works for you. You may want to follow these steps:
- Contribute enough to your 401(k) to get your full employer match.
- Max out your Roth IRA.
- Invest any available funds in your 401(k).
Some investors may prefer to first max out their 401(k) and then invest their remaining disposable income in a Roth IRA.
If you need help plotting a course of action, consider using an online calculator that compares Roth contributions and traditional contributions. A financial professional can also help you run the numbers and determine whether and how much you should contribute to a 401(k) or Roth IRA.
Frequently asked questions (FAQs)
You can roll your 401(k) into a Roth IRA. But if your 401(k) was funded with pretax dollars, you must pay income taxes on the amount you convert.
Whether you should max out your 401(k) or Roth IRA first depends on your financial situation and goals. It’s generally a good idea to contribute enough to your 401(k) to max out your employer contribution. After that, prioritize the account that works for you.
Yes, Roth IRAs and traditional 401(k)s have different tax benefits. Traditional 401(k)s offer an upfront tax break, while Roth IRAs offer tax-free withdrawals in retirement. Some employers offer Roth 401(k)s, which have the same tax advantages as Roth IRAs.
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