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

Some retirement funds are paid for with pre-tax dollars and others are paid with after-tax dollars. That said, you can contribute to a Roth IRA and a 401(K) if you are eligible. The Internal Revenue Service (IRS) allows contributions to both accounts, but there are restrictions on contribution amounts in the tax year and there are income caps as well. You need to learn the advantages and the disadvantages of both the Roth Individual Retirement Account (IRA) and the 401(K) before you allocate money to fund the account(s).

If you have the money and you meet the eligibility requirements you can contribute to a Roth IRA and 401(K). The advantage of having both funds is that you can put away more money each tax year to fund your retirement. If your company-sponsored 401(K) has employer matching contributions, then you will have someone else helping to contribute to your retirement.

The funds for the employer sponsored plans are contributed with pre-tax dollars. The Roth IRA is funded with after tax dollars. If you cannot determine the income tax bracket that you will be in when you retire, then you would be wise to utilize both funds for your retirement contributions. If you are in a higher bracket, then at least some of the retirement funds will be in a sheltered account. Let’s look at the 401(K) plan.

In order to contribute to a Roth IRA and 401(K) you must work for an employer who sponsors the retirement fund called a 401(K). Each year the IRS sets the cap for contributions to the account and the figure is determined by a formula that takes into consideration inflation as one of the factors. Effective 2011, the IRS says you cannot put in more than $16,500. If the employer is matching your contributions then the total of both contributions cannot exceed $49,000. You not only have contribution caps, but you also have income caps to meet the eligibility rules for a Roth IRA.

The IRS also adjusts these limitations using inflation as one of the factors. Your filing status on your federal income tax return will determine which category of contribution limits you fall into. If you are single you can contribute a percentage amount up to the income cap of $122,000. If you are married filing jointly your income cap is higher. The contribution amount is also adjusted for inflation each year by the IRS and the cap for 2011 is $5,000 for the single contributor. A Roth IRA is an individually owned account and there are no contributions by your employer allowed.

Which account should you fund, or should you fund both? If your employer has a sponsored plan and is willing to match your contributions, then you should fund this plan. It is like getting a bonus from your employer each year that will help support you in your retirement years. If you think that the tax rate will be higher in your retirement years than now, it would be advantageous for you to fund a Roth IRA because you will not pay taxes on the distribution part that you fund. You will be taxed on the account investment earnings. If you have sufficient income and have money to allocate you can contribute to a Roth IRA and 401(K) and doing so will give you more financial freedom in your retirement years.