Yes, you can contribute to both a Roth IRA and a 401(k) in the same year

You are allowed to put money into a Roth IRA and a 401(k) during the same calendar year. The two accounts are separate retirement savings tools with different rules, and the IRS lets you use both. However, there are limits on how much you can contribute to each, and your income may affect whether you can contribute to a Roth IRA at all.

The key thing to understand is that the contribution limits are separate. The money you put into your 401(k) does not count against your Roth IRA limit, and vice versa. But if your income is too high, you may not be able to contribute to a Roth IRA even if you have room in your 401(k).

Key Takeaways

  • You can contribute to both a 401(k) and a Roth IRA in the same year because they have separate contribution limits set by the IRS.
  • Your 401(k) contributions are taken from your paycheck by your employer, while Roth IRA contributions come from money you deposit yourself.
  • If your income exceeds certain thresholds, you may not be able to contribute to a Roth IRA, even if you have a 401(k).
  • Contributing to both accounts can give you tax advantages in retirement because 401(k) contributions reduce your current taxable income while Roth IRA withdrawals are tax-free.

How the contribution limits work for each account

For 2024, you can contribute up to $23,500 to a 401(k) and up to $7,000 to a Roth IRA in the same year. These limits are set by the IRS and change occasionally. The 401(k) limit applies to the total you contribute across all 401(k) plans you may have with different employers, but the Roth IRA limit is separate and does not interact with your 401(k) limit.

If you are 50 or older, you can contribute an additional $7,500 to your 401(k) (called a catch-up contribution) and an additional $1,000 to your Roth IRA. Again, these are separate pots of money, so hitting the limit in one does not affect the other.

The limits can shift year to year based on inflation. Your employer's 401(k) plan administrator or your Roth IRA provider will tell you the current limits when you enroll or update your contributions.

Income limits for Roth IRA contributions

While there is no income limit for 401(k) contributions, the IRS does restrict who can contribute to a Roth IRA based on how much you earn. If your income is above a certain threshold, you cannot contribute to a Roth IRA at all, or you can only contribute a reduced amount.

The income thresholds depend on your filing status (single, married filing jointly, married filing separately, or head of household) and change each year. For 2024, if you are single and your modified adjusted gross income (MAGI) exceeds $146,000, you cannot contribute the full amount. If you are married filing jointly, the limit is higher. Your tax preparer or the IRS website can tell you the exact threshold for your situation.

Your 401(k) contributions do not count toward this income limit, so even if you earn too much to fund a Roth IRA, you can still contribute to your 401(k) without restriction.

Why you might want to use both accounts

Using both a 401(k) and a Roth IRA gives you flexibility in how your retirement money is taxed. Money you put into a 401(k) reduces your taxable income for the year (if it is a traditional 401(k)), which can lower the taxes you owe right now. Money you put into a Roth IRA does not reduce your current taxes, but when you withdraw it in retirement, you pay no taxes on the earnings.

This combination can be useful if you want to spread your tax burden across different types of accounts. Some people contribute the maximum to their 401(k) first (especially if their employer offers a match), then put additional savings into a Roth IRA to get tax-free growth on top of the tax-deferred growth in the 401(k).

Another reason to use both is that 401(k)s and Roth IRAs have different withdrawal rules. A 401(k) generally requires you to start taking withdrawals at age 73 (as of 2023), while a Roth IRA has no required withdrawals during your lifetime. If you want flexibility in retirement, having both types of accounts can help.

How to set up contributions to both accounts

Your 401(k) contributions happen automatically through your employer's payroll system. When you enroll in your company's 401(k) plan, you choose a percentage of your paycheck to contribute, and your employer deducts that amount before paying you. You cannot contribute to a 401(k) on your own; it must be through an employer plan.

A Roth IRA is different. You open one at a bank, brokerage, or investment firm and fund it yourself by transferring money from your checking or savings account. You can contribute as much as you want up to the annual limit, and you can do it all at once or spread it throughout the year. There is no employer involvement.

To contribute to both, you straightforward enroll in your 401(k) at work and open a Roth IRA at a financial institution of your choice. The two processes are completely separate, and you manage them independently.

What happens if you exceed the limits

If you accidentally contribute more than the IRS limit to a 401(k), your employer's plan administrator will catch it and return the excess to you, usually with any earnings it generated. You may owe taxes on those earnings, and there can be penalties, so it is important to monitor your contributions if you change jobs during the year.

If you over-contribute to a Roth IRA, the IRS charges a 6% excise tax on the excess amount each year it remains in the account. You can withdraw the excess and avoid the penalty, but you should do this before filing your tax return. If you discover an over-contribution after you have already filed, you may be able to correct it, but it is easier to avoid the problem by tracking your income and contributions carefully.

Frequently Asked Questions

Does contributing to a 401(k) reduce how much I can put in a Roth IRA?

No. The contribution limits are completely separate. You can max out your 401(k) and still contribute the full amount to a Roth IRA, as long as your income does not exceed the Roth IRA income limit. The only connection is that your income affects Roth may be able to access, not your 401(k) contributions.

If my employer matches my 401(k), does that count toward my contribution limit?

No. The $23,500 limit (for 2024) is only what you contribute from your paycheck. Your employer's matching contribution does not count toward your limit. However, the total of your contributions plus your employer's match cannot exceed $69,000 for the year.

Can I contribute to a Roth IRA if I do not have a 401(k)?

Yes. A Roth IRA does not require an employer plan. You can open one and contribute on your own as long as you have earned income and your income is below the IRS threshold. Many people use a Roth IRA as their only retirement savings vehicle.

What if I change jobs during the year?

Your 401(k) contribution limit applies across all 401(k) plans you participate in during the year. If you contribute $12,000 to your first employer's plan and then move to a new job with a different 401(k), you can only contribute $11,500 more in 2024 (the remaining portion of the $23,500 limit). Your Roth IRA limit stays the same regardless of job changes.

Should I max out my 401(k) before funding a Roth IRA?

That depends on your situation. If your employer offers a match, most financial advisors suggest contributing enough to your 401(k) to get the full match first, since that is information programs. After that, whether to prioritize the 401(k) or Roth IRA depends on your current tax bracket, expected retirement tax bracket, and personal preference. There is no one-size-fits-all answer.