Can You Contribute to a 401K and a Roth IRA?

A 401(K) is a retirement fund that is sponsored by an employer and you can contribute to a 401(K) and a Roth IRA (Individual Retirement Account) and you will maximize the amount that you can fund for your retirement savings. The employer is the administrator of the plan sponsored by the company that you work for. A Roth IRA is managed by the administrator of the fund who works for the institution that you choose as a manager of your Roth funds. If you have an income you can have a Roth IRA. If you have an employer who offers a sponsored retirement fund you can have one. You can own both.

You can contribute to a 401(K) and a Roth IRA but you should learn as much as possible about the benefits and the risks each plan has. If your employer matches contributions then you should take advantage of the money he is offering and make the maximum allowable contribution. This way you can maximize your contributions without allocating all your money. For example: Your boss says that for every $1.00 you contribute to the plan, he will match with a fifty-cent contribution. If you put in $500, your employer will put in $250. This is money you did not have to earn and that is a benefit available to employees who fund a retirement account.

You can contribute to a 401(K) and a Roth IRA only if you fall below the income cap on eligible contributors. For contributions to a Roth IRA you must look up the amount of income that you are allowed to make and you will find the percentage of the contribution that you can claim on your tax return for that tax year. For example, the 2010 tax year limits have been published by the IRS and if you are single you have an income cap of $105,000 and if you are married your income cap is $166,000. This is for the maximum allowable contribution percentage. If you are single and you make between $105,000 and $120,000 you will be allowed a percentage contribution that falls to zero when you reach the upper-income limit. Likewise, if you are in the married filing jointly status you can only make between $167,000 and $177,000 before your contribution level drops to zero.

Roth IRA contributions are made from after-tax income. This means that when you withdraw the retirement funds you will not be responsible for paying taxes on the withdrawal. The amount of money that your investment earns from over the investment time will be taxed at the current taxation rate at the time of withdrawal. The 401(K) is paid with money from pre-tax earnings and you will pay taxes on all the withdrawals from the account. If the tax bracket rises in the future and you have already paid taxes on the funds at the lower rate, you will have the advantage.

There are contribution limits for both type accounts and these limits are adjusted on an annual basis by the IRS. If no adjustment is necessary, the IRS will reaffirm the contribution limit that is in place. The limits are put into a formula by the IRS and adjusted for inflation. If you have made the maximum contribution to your 401(K), then take advantage of the Roth IRA plan to put more away for your retirement years. So if you’ve already maxed out your 401k, you can save more money by putting it into your Roth IRA. You can contribute to a 401(K) and a Roth IRA but you should check with your accountant or read the IRS Publication and find out the limits for that tax year.