Understand the rules for contributing to a 401k and a Roth IRA.By Adam Levy – Updated Sep 21, 2022 at 5:11PM Show
If your employer offers a 401(k) plan, there may still be room in your retirement savings for a Roth IRA. Yes, you can contribute to both a 401(k) and a Roth IRA, but there are certain limitations you'll have to consider. Source: Getty Images This article will go over how to determine your eligibility for a Roth IRA. You'll also learn how much you can contribute to that Roth IRA, how to work around the eligibility restrictions, the flexibility of saving in a Roth IRA versus other individual retirement accounts, and the benefits of saving in both a 401(k) and a Roth IRA. Check your eligibilityThe first step in determining your eligibility for contributing to a Roth IRA is to find your modified adjusted gross income. That means adding up your wages, interest earned (including qualified savings bonds), dividends, capital gains, and other income. While you'd normally subtract items like student loan interest or tuition and fees, you won't for the purposes of determining your modified AGI for a Roth IRA. You can find a full breakdown of how to determine your modified AGI on the Internal Revenue Service's website. Once you've determined your modified adjusted gross income, you simply have to compare it to the following table to determine your eligibility.
Data source: IRS. Contribution limits for Roth IRAsFor most households, the Roth IRA contribution limits in 2021 and 2022 will be the smaller of $6,000 or your taxable income. If you're age 50 or older, you can make an additional $1,000 catch-up contribution. Some may see a reduced contribution limit based on their modified AGI. If you make within $10,000 or $15,000 of the maximum modified AGI, you'll have to do a little math.
For example, if you're a married couple and you have a combined AGI of $200,000 in 2021, you'd:
Importantly, the $6,000 (or $7,000) contribution limit applies to all IRAs. The income limits for the Roth IRA apply only to Roth IRA contributions, so you could still contribute to a traditional IRA up to the $6,000 (or $7,000) limit. Those contributions won't be tax deductible, though, if your Roth contributions are limited by your income and you have a 401(k) at work. How to get money into a Roth IRA even if you're not eligible to contributeSavvy savers can still get money into a Roth IRA even if they're not eligible to contribute to one directly. They can utilize the backdoor Roth IRA strategy. This involves making a nondeductible contribution to a traditional IRA and converting those funds into a Roth IRA. If you have other IRA accounts with pre-tax contributions in them, you'll have to mind the pro rata (or aggregation) rule. This makes the backdoor Roth strategy ineffective. You can get around the problem if your work 401(k) allows rollovers from an IRA. Roll over your pre-tax IRA funds into the 401(k) and then use the backdoor Roth conversion. Saving for retirement in a Roth IRAIf you meet the income requirements for contributions, there are two compelling reasons to use a Roth IRA for retirement savings.
Other reasons to use a Roth IRAOne of the biggest advantages of a Roth IRA over other retirement savings accounts is the ability to access contributions at any time. Thus a Roth IRA can be a good vehicle to save for preretirement goals if you otherwise wouldn't contribute to an IRA. Assuming you're eligible for Roth IRA contributions, let's say you deposit $9,000 over three years. You invest those contributions in low-cost mutual funds, and your balance grows to about $13,000 in six years. At that point you decide to buy a car. You can withdraw up to $9,000 from the account without explanation and without penalties. You can't touch $4,000 in earnings unless you want to pay income taxes plus a 10% penalty. There's also a way to access your Roth IRA earnings early, without paying penalties or taxes. You can withdraw up to $10,000 in earnings (plus any amount of contributions) if you use the money for a home purchase. These are the requirements:
The $10,000 earnings withdrawal exception is a lifetime cap, so you can't repeat this move in the future. If you use the backdoor Roth strategy, you can access conversions after five years. You can use conversions to gain access to your traditional pre-tax retirement accounts early without paying a penalty if you strategically convert funds five years before you'll need them. You'll still owe taxes on the funds at the time of conversion. Benefits of having both a 401(k) and a Roth IRAUsing both a 401(k) and a Roth IRA to save can be a great option for someone looking to put as much money as possible into tax-advantaged retirement accounts. If you're a higher-income earner on the edge of qualifying for a Roth IRA contribution, making a 401(k) contribution could push you under the income limitations, since those contributions don't count toward your AGI. That would open the door for more flexibility with short-term savings in a Roth IRA. Ultimately, an employer-sponsored 401(k) shouldn't prevent you from getting money into a Roth IRA. While you should consider any other options at your disposal, maximizing the amount of money in your tax-advantaged savings accounts is usually a good strategy for a healthy retirement. The Motley Fool has a disclosure policy. Related ArticlesShould you have both a Roth IRA and a 401k?Putting your money into both a 401(k) plan and a Roth IRA offers the perfect mix of tax savings—some now and some in the future. Roth IRA savings are made with after-tax dollars, so there's no conflict between this type of plan and a traditional 401(k), which is funded with pre-tax dollars.
Should I have a Roth 401k and Roth IRA?Roth 401(k) is best for you. Both accounts are easy to set up, but your employer does most of the setting up with a Roth 401(k), whereas you'll need to do the work yourself with a Roth IRA (some employers do offer paycheck deductions for IRAs). Want access to a large variety of investments. Roth IRA is best for you.
Can I contribute to a Roth IRA if I don't have a 401k?If you don't have a 401(k), start saving as early as possible in other tax-advantaged accounts. Good alternatives to a 401(k) are traditional and Roth IRAs and health savings accounts (HSAs).
Is a 401k and Roth IRA enough?The Bottom Line. Since a 401(k) may not be sufficient for your retirement, building in other provisions is essential such as making separate, regular contributions to a traditional or Roth IRA. It's always a good idea to have more options when you reach the "distribution" phase of your life.
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