Can I contribute to a 401(K), an IRA, a Roth IRA, and a Roth 401(k)?
You can contribute to a 401(k), an IRA, a Roth IRA, and a Roth 401(k) all at the same time. In fact, diversifying your accounts can help boost your savings even more.
When starting to save for retirement, the vast array of retirement account options can be dizzying. The most common retirement accounts to contribute to are a 401(k), an IRA, a Roth IRA, and a Roth 401(k). But can you invest in all four?
Yes—in fact diversifying your retirement savings is a good idea. Contributing to a 401(k), an IRA, a Roth IRA, and a Roth 401(k), allows you to enjoy the benefits of each.
When deciding which one to contribute to, it’s essential to understand how each one works. Each account has its pros and cons, and knowing the features of each can help you decide which one is best for your retirement goals.
Let's go over how you're able to contribute to multiple retirements and whether it's worthwhile.
First, You Need to Understand Contribution Limits
Before we get into how to contribute to multiple 401(k)s and IRAs, we need to understand the limitations.
The IRS sets limits to how much you can contribute to your retirement accounts. 401(k)s have different contribution limits than IRAs.
The contribution limit for any 401(k) account is $19,500. This limit is for total contributions, whether to just one account or split between a 401(k) and Roth 401(k). If you are 50 and older, you can contribute an additional $6,500 as a catch-up bonus.
Additionally, if you receive an employer match, the total contribution for a 401(k) can’t exceed $58,000, or $64,500 if you're 50 and older.
For IRAs, the IRS limits annual contributions to $6,000 for each account. Individuals 50 and older can contribute an additional $1,000.
Can I Contribute to a Roth IRA and a Roth 401(k)?
Contributions made to both Roth IRAs and Roth 401(k)s are made with after-tax dollars. The downside to this is your immediate income tax obligations reduce the amount you can contribute.
Additionally, the IRS limits the participation in a Roth IRA to those who make modified adjusted gross income of $140,000 or less per year. Anyone who makes more than the limit will be taxed 6% on the money they’ve contributed every year until it is transferred to an eligible retirement account.
However, the primary benefit of Roth IRA and Roth 401(k)s is that distributions during retirement are tax-free. Making contributions early means the more tax-free withdrawals you'll be able to take during retirement.
If your employer offers a Roth 401(k) as an option in their plan, you can contribute to it and contribute to a Roth IRA. You can contribute to both accounts if you stay below the $19,500 limit for a Roth 401(k) and the $6,000 limit for a Roth IRA.
Can I Contribute to a Roth IRA and a 401(k)?
Most retirement savings are made through employer-sponsored 401(k) plans. If your employer offers to match a percentage of your contributions, it's a great way to increase your retirement savings with free money.
In addition to your 401(k) contributions, you can contribute to a Roth IRA. A Roth IRA will be held outside of your employer-sponsored plan but is just as easy to set up.
Adhere to the contribution limits both—$19,500 and $6,000 respectively—and you can grow your retirement savings by $25,500 annually ($33,000 if you're 50 and older) plus any employer contributions.
A good strategy would be to contribute to your 401(k) up to the amount your employer matches. Then, contribute as much as you can towards your Roth IRA until you reach the limit. This way, you'll maximize the free money you'll receive from your employer and increase the amount of tax-free distributions you'll have during retirement.
Can I Contribute to a Traditional IRA and a 401(k)?
If you prefer contributing pre-tax money towards your retirement accounts, the two options you have are a traditional IRA and an employer-sponsored 401(k).
Like a Roth IRA, a traditional IRA is set up through an outside institution, like Fidelity. However, instead of allocating after-tax dollars like a Roth IRA, a traditional IRA uses money before taxes are taken out.
This means you can contribute more to your traditional IRA and have less tax burden during your working years. However, like a 401(k), the distributions you take during retirement will be taxed.
You can contribute up to $6,000 towards your traditional IRA while still contributing towards your 401(k). Like the previous scenario, you can contribute a total of $25,500 towards retirement, $33,000 if you're 50 and older.
Additionally, you can rollover old 401(k)s into an IRA. Rather than transferring old 401(k)s into your current 401(k), you can consolidate them into an IRA and take advantage of the increased investing options.
Can I Contribute to a 401(k), an IRA, a Roth IRA, and a Roth 401(k)?
If you have the means, you can certainly contribute to all four retirement accounts as long as your contributions stay under the IRS limits.
The maximum amount an individual can contribute to all four accounts is $31,500, or $40,000 for those 50 and older.
Contributions made towards both a 401(k) and Roth 401(k) can't total more than the limit of $19,500. While $6,000 can be contributed each towards a traditional IRA and a Roth IRA.
Additionally, an employer's matching contributions towards a 401(k) can't increase the total 401(k) contribution to more than $58,000 or 100% of your income, whichever is less.
The Benefits of Diversifying Your Retirement Accounts
We've touched on the difference between traditional and Roth retirement accounts. It's important to consider each in regards to your current financial situation and your retirement goals.
Matching contributions by an employer are a great incentive to contribute towards a 401(k). Additionally, the tax-free retirement distributions of Roth IRAs and Roth 401(k)s are something to consider as well.
Moreover, the investment options provided by a 401(k) plan are significantly limited to the options provided in an IRA. By spreading out your retirement savings between 401(k)s and IRAs, you can take advantage of your employer's 401(k) match and invest in a broader array of investments in an IRA.