Should I Have a Roth IRA and a 401k: A Comprehensive Guide

Having a Roth IRA and a 401(k) can be a great way to save for retirement, but it's essential to understand the benefits and drawbacks of each.

With a Roth IRA, you contribute after-tax dollars, and the money grows tax-free, which means you won't have to pay taxes on the withdrawals in retirement.

In contrast, a 401(k) allows you to contribute pre-tax dollars, reducing your taxable income for the year, but you'll pay taxes on the withdrawals in retirement. The 401(k) contribution limit for 2022 is $19,500, with an additional $6,500 catch-up contribution allowed for those 50 and older.

By having both a Roth IRA and a 401(k), you can take advantage of the tax benefits of both, potentially reducing your tax liability in retirement.

Here's an interesting read: Benefits of 457 Plan

A Roth IRA and a 401(k) are two popular retirement savings options. If you're eligible for both, it's a good idea to invest in both accounts, as it allows you to take advantage of employer matching and tax benefits.

One key difference between the two is how contributions are taxed. With a Roth IRA, contributions are made with after-tax dollars, allowing investments to grow tax-free. In contrast, contributions to a 401(k) are made with pretax dollars, lowering your taxable income.

Here's a quick rundown of the main differences between a Roth IRA and a 401(k):

Don't forget that many employers offer a match on 401(k) contributions, which can be a significant benefit.

A retirement account is a type of savings plan that helps you prepare for your golden years.

Employers often offer 401(k) plans as a way to encourage employees to save for retirement, allowing you to invest a percentage of your salary or a specific amount each pay period.

These plans automatically take the money out of your paycheck and put it into retirement savings, making it easy to start saving.

Some employers may also offer other types of retirement accounts, but a 401(k) is one of the most common options.

By investing in a 401(k) or other retirement account, you can build a nest egg to support yourself in retirement and enjoy the freedom to pursue your passions.

Check this out: Can You Add Money to a Rollover Ira

An IRA is a type of savings account that helps you save for retirement, and it can be either a Traditional IRA or a Roth IRA.

One key difference between an IRA and a 401(k) is that an IRA has no employer match, meaning you won't get free money from your employer to contribute to your IRA account.

You can contribute up to $6,000 to an IRA in 2022, and if you're 50 or older, you can contribute an extra $1,000 as a catch-up contribution.

A Roth IRA is a type of IRA that allows you to contribute after-tax dollars, which means you've already paid income tax on the money you put in.

Take a look at this: How to Check If I Have Money in 401k

With a traditional 401(k), your contributions are tax-deferred, which means you lower your taxable income and get a tax break for the year.

However, you'll pay taxes on any withdrawals you take out at retirement, including all your contributions, your employer's contributions, and the growth your investments earned.

A Roth IRA, on the other hand, requires you to pay taxes upfront with each contribution, but withdrawals are tax-free.

You might enjoy: Do You Pay Taxes on Roth Ira Capital Gains

With a 401(k), your contributions get automatically deducted from each paycheck and are not taxed, meaning you don't pay taxes until you withdraw.

Tax is deferred with a 401(k), so your contributions into your 401(k) account are made with pre-tax dollars.

You pay taxes upfront with each contribution to a Roth IRA, but withdrawals later on are tax-free.

Your employer may also give you the choice of a Roth 401(k), which offers tax-free distributions, similar to a Roth IRA.

Unlike a Roth IRA, a traditional 401(k) offers tax benefits on the front end, lowering your taxable income and giving you a tax break for the year.

You’ll pay taxes on any withdrawals you take out at retirement from a traditional 401(k), including all your contributions, your employer’s contributions, and investment growth.

Contribute to a Roth IRA with after-tax dollars, and the money will grow tax-free inside the account and you won’t pay a dime in taxes when you withdraw your money at retirement.

Once you’re ready to retire, most of the money in your Roth IRA will be growth, so no taxes on that growth means hundreds of thousands of dollars stay in your pocket.

Check this out: Tax-free Savings Account

With a traditional 401(k), you won't pay taxes on your contributions, but you will pay taxes on those funds in retirement.

You'll pay taxes on your 401(k) withdrawals in retirement, which could lead to a hefty tax bill depending on your tax bracket at the time.

Any early withdrawals from a traditional 401(k) before age 59.5 will typically force you to pay penalties and taxes, though there are hardship exceptions.

The tax on your 401(k) withdrawals in retirement could be a significant one, so it's essential to factor this into your retirement planning.

With a Roth IRA, you pay taxes upfront on your contributions, so you won't pay taxes on withdrawals later on, but you can withdraw your contributions at any time without paying tax or penalties.

Check this out: Roth Ira First Time Homebuyer

Contribution limits and rules are important to understand when considering a Roth IRA and a 401(k).

Roth IRA contributions do not count toward your 401(k) limit.

You can contribute to both a Roth and a traditional IRA, but the combined amounts can't exceed the annual contribution limit for each.

For another approach, see: Tax Deferred Contribution

For 2023, the 401(k) limit is $22,500, or $30,000 if you're age 50 or older.

You can contribute up to $6,500 to an IRA in 2023, or $7,500 if you're age 50 or older.

It's generally advised to max out your retirement accounts, but we realize that's not something everyone can afford to do.

Prioritize contributing as much to your 401(k) as you need to meet an employer match, if your company offers one.

If your company matches up to 6% of your salary, contribute 6% so that you're doubling what you can save for retirement.

You can then contribute the remaining amount to your Roth IRA.

Contribute 10% to 15% of your pre-tax income each year to your retirement savings accounts.

Using the example above, if you contribute 6% of your pre-tax income to your 401(k) and your employer matches that with another 6%, that means you're already putting 12% of your pre-tax income toward retirement.

A fresh viewpoint: Can I Contribute to a Rollover Ira and a 401k

Income limits on Roth IRAs are a crucial consideration when planning your retirement savings. If your modified adjusted gross income (MAGI) reaches a certain threshold, the amount you can contribute to a Roth IRA is reduced or eliminated.

For 2024, the income limits for Roth IRA contributions are as follows:

These income limits apply to both 2024 and 2025, with some slight variations. For 2025, the income limits are as follows:

It's worth noting that you can contribute to both a 401(k) and a Roth IRA in the same year, but there are limits to how much your employer can contribute to your 401(k) if you make more than $345,000.

For more insights, see: Can I Have a Solo 401k and a Sep Ira

Roth IRA contributions do not count toward your 401(k) limit.

However, if you contribute to both a Roth and a traditional IRA, the combined amounts can’t exceed the annual contribution limit for each.

You can only invest up to $7,000 in a Roth IRA in 2024 (or $8,000 if you’re age 50 or older). That's significantly lower than the 401(k) contribution limit.

The 401(k) contribution limit for 2024 is $23,000, making Roth IRAs a more limited investment option.

If you're under 50, the Roth IRA contribution limit is $7,000, but if you're 50 or older, you can invest up to $8,000.

Explore further: How to Invest Ira

Having both a 401(k) and a Roth IRA can provide tax diversification benefits, allowing you to have both tax-free and taxable income in retirement.

Contributions to a 401(k) are made with pretax dollars, which means you'll pay income tax on that money in the future.

A Roth IRA, on the other hand, is made with after-tax dollars and grows tax-free.

If you're in a lower tax bracket in retirement, you could come out ahead with a 401(k) because your contributions would be tax deductible at your current, higher rate.

Having both accounts can be beneficial if you have assets that would trigger substantial taxes, such as investments with high growth potential or stocks with hefty dividends.

Qualified withdrawals from a Roth IRA are tax-free, which can be a significant advantage.

If this caught your attention, see: Free Solo 401k

When deciding between a Roth IRA and a 401(k), consider your tax situation and goals. If you expect to be in a higher tax bracket in retirement, a Roth IRA may be a better choice.

A Roth IRA allows you to contribute after-tax dollars, which means you've already paid income tax on the money. In contrast, a 401(k) is a pre-tax account, where contributions are made before taxes are taken out. This can result in a larger tax bill in retirement if you're in a higher tax bracket.

Ultimately, the decision between a Roth IRA and a 401(k) depends on your individual circumstances, but it's worth considering the potential tax benefits of each option.

A 401(k) and a Roth IRA have significant differences in how you can benefit from each account.

You can withdraw contributions from a 401(k) at any time without penalty.

A Roth IRA, on the other hand, requires you to pay taxes on your contributions upfront, but withdrawals are tax-free in retirement.

Traditional IRA vs. Roth IRA: What’s the difference? suggests using a traditional or Roth IRA to save for retirement.

A 401(k) allows you to contribute pre-tax dollars, reducing your taxable income for the year.

Additional reading: 401k Rollover to Ira Tax

If you're considering opening a Roth IRA or a 401(k), you're likely trying to decide which one is best for you. Let's break down the major differences between these two popular retirement savings options.

Eligibility

A Roth IRA is more accessible than a 401(k), as you can open one with earned income, whereas a 401(k) is only available through employer-sponsored programs. Married couples with only one income earner can also open a spousal Roth IRA.

Contributions to a Roth IRA are made with after-tax dollars, allowing investments to grow tax-free. On the other hand, contributions to a 401(k) are made with pretax dollars, lowering your taxable income.

Contribution Limits

The contribution limits for a Roth IRA are $7,000 per year for those under 50, while those 50 or older can contribute up to $8,000. For a 401(k), the 2024 limit is $23,000 per year for those under 50, and $30,500 for those 50 or older.

Expand your knowledge: How to Open a Solo 401k

Employer Contribution

One of the benefits of a 401(k) is that many employers offer a match based on a percentage of your gross income. Unfortunately, there's no matching contribution for a Roth IRA.

Required Minimum Distributions (RMDs)

A 401(k) has RMDs starting at age 72 (or 73 if you turn 72 after Dec. 31, 2022), which means you'll have to take out a certain amount each year to avoid penalties. On the other hand, a Roth IRA has no RMDs, so the money can sit in your account as long as you live.

Investment Menu

A Roth IRA gives you a wider variety of investment options and more control over how you invest, whereas a 401(k) has a more limited investment menu, controlled by a third-party administrator.

Here's a quick comparison of the two options:

You have control over your Roth IRA, while your employer manages your traditional 401(k).

Contributions to a Roth IRA are made with after-tax dollars, whereas traditional 401(k) contributions are typically made with pre-tax dollars.

The contribution limits for a Roth IRA are $7,000 in 2024 and 2025, with an additional $1,000 allowed if you're over 50. Traditional 401(k) contribution limits are significantly higher, at $23,000 in 2024 and $23,500 in 2025, with an additional $7,500 allowed if you're over 50.

Qualified distributions from a Roth IRA are tax-free, while traditional 401(k) withdrawals are typically taxed.

There are no required minimum distributions (RMDs) for a Roth IRA, but you'll need to take RMDs from a traditional 401(k) starting at age 73 or 75 if you were born in 1960 or later.

Here's a side-by-side comparison of the two:

Investing in your 401(k) up to the employer match is the best place to start.

You should also consider opening a Roth IRA to diversify your retirement savings.

Make sure to reach your goal of investing 15% of your gross income in retirement.

Good advice is essential when it comes to investing, so don't be afraid to seek it out.

Growth stock mutual funds with a history of strong returns are a great way to use the power of the stock market to build wealth.

Steer clear of trendy investments like single stocks, precious metals, and cryptocurrency that you don't fully understand.

Investing in anything you don't understand is a recipe for disaster.

Saving and investing now is crucial to having something to live on in retirement.

If you're eligible for a 401(k) and a Roth IRA, the best-case scenario is that you invest in both accounts. This way, you're taking advantage of your employer match and getting the tax benefits of a Roth IRA.

The key is to remember the rule: Match beats Roth beats traditional. An employer match is free money, and you simply don't leave free money on the table.

Let's say you make $60,000 a year and you're under 50. Once you're debt-free and have a fully funded emergency fund, your goal is to invest 15% of your income for retirement. This translates to $9,000 in this case.

You might enjoy: Ira Rollover Match

Start by investing in your 401(k) up to the match your company offers. For example, if your company offers a 3% match, you invest $1,800 in your 401(k) to reach the employer match. This leaves you with $7,200 more to invest.

If your company offers a Roth 401(k) option, you can simply invest your entire 15% in your Roth 401(k) and you're done!

Here's a breakdown of how to allocate your 15% goal:

Keep in mind that more companies are starting to offer a Roth 401(k) option, which combines many of the benefits of a 401(k) and a Roth IRA. If you're older than 50 and behind on your retirement savings, you can make catch-up contributions to max out your Roth IRA at $8,000 and your 401(k) at $30,500 in 2024.