Can you contribute to both 401k and Roth 401k?
How much in total?
Yes you can contribute to both a ROTH 401k and a Traditional 401k.
If you under 50, you can contribute $18,000 per year. Any matching or profit sharing is on top of this amount.
If you are over 50 you can contribute $24,000 per year.
Here is some more information on contribution limits and other types of retirement accounts.
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DAVID RAE, CFP®, AIF® is a Los Angeles-based Retirement Planning Specialist with DRM Wealth Management, a regular contributor to Advocate Magazine, Huffington Post, Investopedia not to mention numerous TV appearances. He helps smart people across the USA get on track for their financial goals. For more information visit his website at www.davidraefp.com or the Fiduciary Financial Planner LA blog.
Yes, an individual can contribute to both a 401k and a Roth 401k. The total contribution into both types of deferrals cannot exceed $18,000 for individuals under 50, and $24,000 for those 50 and over. For example, a 30-year-old person could contribute $9,000 into his or her regular 401k and $9,000 into the Roth 401k portion, for a total of $18,000 in 2016.
There are two key factors that should be considered when deciding between making regular 401k contributions vs. Roth 401k contributions—or potentially a combination of both:
- Current taxable income and expected future taxable income
- Discretionary income
Current Taxable Income and Expected Future Taxable Income
Contributing into a regular 401k will help reduce your taxable income: The contributions you make are “pre-tax.” Invested assets in these accounts grow tax deferred; the distributions you ultimately take are taxable at ordinary income levels. Making Roth 401k contributions, on the other hand, will not reduce taxable income because contributions are “after-tax.” But your investments in a Roth 401k will grow tax free and distributions are tax free as well.
The main reason most individuals contribute to a Roth 401k is they believe tax rates will increase in the future. The thinking here is that contributing into a Roth 401k will help decrease their potential taxes when they start to take distributions from their accounts since distributions from Roth 401ks are tax free.
If you’re planning to contribute into a Roth 401k (vs. a regular 401k), keep in mind that you will have a higher taxable income at the end of the year. You’ll need to budget and have funds available to pay any potential taxes.
For example, an individual who earns $100,000 and makes a regular 401k maximum contribution of $18,000 will have a taxable income of $82,000 because regular 401k contributions decrease taxable income. If the same person were to make an $18,000 Roth 401k contribution, he or she would be taxed on $100,000 of taxable income—because these contributions are “after-tax.” This would amount to paying approximately $4,500 in additional taxes.
Contributions into Roth 401ks generally favor investors who are younger, with lower taxable incomes. Regular 401k plan contributions favor higher earners because contributions decrease taxable income and allow for individuals to have a higher take-home pay after withholdings.
You can indeed contribute to both at the same time as long as the total amount contributed each year in both does not exceed the annual limit for 401k contributions based on your age. The limit across both accounts is $18,000 plus $6,000 if over 50. As you may know, money going into the traditional 401k will reduce your current income tax liability today and money going in the Roth 401k will provide tax free income in retirement. Money coming out of the traditional 401k is subject to ordinary income taxes.
If you are younger than 50 the maximum you can contribute to all 401(k) regardless of type and regardless of the number of employers is $18,000 (2016). If you are age 50 or older you can contribute an additional $6,000.
Yes you can do both but you may be phase out of the Roth IRA contribution if you income is too high. If you are single it begins to be phased out at $118,000 and is completely phased out at $133,000. If married filing jointly, the phase out range is $186,000 to $196,000. The Roth IRA limits are $5,500 under 50 and a $1,000 catch-up provision if 50 or older for a total of $6,500 over 50.
401k limits are $18,000 under 50 or $24,000 50 or over with a $6,000 catch-up provision. Many people who can afford to max out the $18k+ 401k have too high of an income to do a Roth as are phased out of being able to make the contribution. But if you are a big saver, it is definitely possible.
The other alternative is to do a Traditional IRA contribution as there are not limits on contributions, but are limits on deductibility. Then you could do a conversion to a Roth. This is known as a "backdoor" Roth contribution but when you do the conversion from the Traditional IRA, it is taxable as income but a way to get into the Roth IRA with this 2 step process. Yes, this seems like a ridiculous rule but I am just the messenger.
Hope this helps and best of of luck, Dan Stewart CFA®