Can I contribute to a traditional 401(k) and a Roth IRA?
I am currently contributing to a company sponsored 401(k). I contribute 8% (annual salary $60K), which comes out to $4,800 for the year. Can I also set up and contribute to a Roth IRA? If so, what amount can I contribute?
ABSOLUTELY! Good for you for looking for ways to maximize your options.
You can contribute up to $18K in a 401(k) ($24K if 50+ years old). Ideally, you would contribute as much as the company match, if applicable (free money).
You can contribute up to $5,500 in a ROTH/IRA ($6,500 if > 50+).
The contribution limits for 401(k) and ROTH/IRA are not connected. The limits within ROTH/IRA are though.
Your eligibility to contribute to an IRA (Traditional or Roth) is the same, regardless of whether or not you contribute to a company-sponsored retirement plan, like your 401(k).
The limit for IRA contributions is $5,500/year. If you are over the age of 50, you are eligible to contribute an additional $1,000 "catch-up" contribution, for a total of $6,500/year. This is the total you can contribute to all of your IRAs, Traditional and Roth. In other words, you cannot contribute $5,500 to a traditional IRA, AND $5,500 to a Roth IRA. You can, however, contribute up to the limit for your spouse, even if they do not work. This means that a married couple can contribute up to $11K/year ($12K if both are over 50) to their IRAs ($5,500/$6,000 for each).
There are some additional rules for being able to contribute to a Roth, as you must be below a certain income limit. If you are married filing jointly, your adjusted gross income (AGI) must be below $184K. For singles, your AGI must be below $117K. If your income is above these limits, you might still be able to contribute, but only a reduced amount (see https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2016).
Keep in mind that there is a "back door strategy" for contributing to a Roth IRA, even if your income exceeds the limits for being able to contribute directly to a Roth. However, you should consult with a financial professional to assess whether or not this strategy makes sense for you because it does have tax implications.
The simple answer is yes. You can contribute $18,000 to your 401(k) with a catchup provision of an additional $6,000 if you are over 50, and contribute $5,500 to a Roth with a $1,000 catchup over 50. You can only do this if your income is below $117,000 for an individual or $184,000 for married filing jointly.
Best of luck and Happy Holidays, Dan Stewart CFA®
Yes, you may contribute to both. Inside of the 401(k) plan, you are allowed to make deferrals up to $18,000 in 2015-2017, those over age 50 can do an additional catch up of $6,000 into the 401(k) for a total of $24,000. Then you may also make a contribution to an individual retirement account, Traditional IRA, Roth, or both up to a maximum of $5,500/year in 2015-2017 and if over age 50, an additional $1,000.
Jeremy Reif, CRPS
In your situation, yes. The amount you can contribute to the Roth IRA is based on your age. If you are under 50 years old, $5,500 is the annual max. If over 50, $6,500. It's important to diversify the investments in both your 401(k) and your IRA. An investor needs several different mutual funds to be “diversified.” Diversification helps reduce the risk of loss.