Comparing Contribution Limits: Roth 401(k) vs. Roth IRA

If you have access to a 401(k) from your employer, you may have the choice of putting your money into a traditional or a Roth 401(k). If you're self-employed or have freelance income, you can save for your retirement through an Individual Retirement Account (IRA), choosing a Roth or a traditional IRA,

The big difference is in the amount of money you can save in each of these tax-advantaged retirement accounts. The figures are adjusted for inflation every year. The latest numbers:

  • For 2022, the maximum allowable contribution to a Roth IRA is $6,000. A person age 50 or older can contribute an extra $1,000 as a so-called "catch-up contribution."
  • The 2022 maximum contribution to a Roth 401(k) is $20,500. The catch-up contribution is up to $6,500.
  • For 2023, the maximum for a Roth IRA rises to $6,500. The catch-up contribution remains at $1,00
  • The 2023 maximum contribution to a Roth 401(k) is $22,500. The catch-up contribution is $7,500.

The contribution limits for IRAs and 401(k)s are the same whether the account is a Roth or a traditional version.

Key Takeaways

  • Roth retirement accounts allow savers to grow their money income-tax-free by paying in after-tax dollars.
  • Roth 401(k) plans are offered by many but not all employers who offer the traditional version of a 401(k). In a traditional plan, pre-tax dollars are paid in.
  • Roth IRAs and traditional IRAs are opened independently and are available through most banks and brokerages. The rules are similar but the contribution amounts are much lower.

Roth 401(k)

The Roth 401(k) has only been available since 2006. Modeled after the Roth IRA, the Roth 401(k) provides investors an opportunity to save retirement funds in a tax-advantaged account.

Unlike its traditional counterpart, the Roth 401(k) account is funded with after-tax dollars instead of pre-tax dollars. That means you won't receive a tax deduction for your contributions to a Roth 401(k), but down the road, you won't owe any tax on your qualified distributions.

Offering a Roth 401(k)—or Roth 403(b), for non-profit organizations—is voluntary for employers. To offer such a plan, employers must have a traditional 401(k) plan in place, and they must set up a tracking system to segregate Roth assets from those of traditional 401(k) assets. This may be an expensive proposition, and your employer may choose not to do it.

An employer may match contributions to a Roth 401(k). In fact, if an employer matches a traditional 401(k) plan contribution, it is standard for it to match one for a Roth 401(k). But unlike the employee's contribution, the employer's contribution is placed into a traditional 401(k) plan. That means the employer's match will be taxable when the money is withdrawn. 

76%

Percentage of 401(k) plans that had a Roth option in 2021, according to a Fidelity Investments study.

Roth IRA

Named after Delaware Senator William Roth, and established by the Taxpayer Relief Act of 1997, a Roth IRA is an individual retirement plan (a type of qualified retirement plan) that bears many similarities to the traditional IRA. The biggest distinction between the two is how they’re taxed.

Traditional IRA contributions are generally made with pre-tax dollars; you usually get a tax deduction on your contribution and pay income tax when you withdraw the money from the account after retiring.

However, Roth IRAs are funded with after-tax dollars. The contributions are not usually tax-deductible. (Taxpayers with moderate incomes may be eligible for a Saver's Tax Credit of 10% to 50% of the contribution.)

But once you start withdrawing funds from a Roth IRA, qualified distributions are tax-free.

IRAs, whether Roth or traditional, are not available through employers. They can be opened by any taxpayer who has earned income, and are available at most banks, brokerages, and other financial institutions.

How the Contribution Limits Work

In the 2022 tax year, you can save up to $20,500 in a 401(k). If you're age 50 or older, you can add up to $6,500 as a so-called catch-up contribution.

If you have a Roth IRA, the maximum in 2022 is $6,000. If you're 50 or older, you can add another $1,000.

For the 2023 tax year, you can save a maximum of $22,500 in a Roth 401(k). The catch-up amount increases to $7,500.

For a Roth IRA account, the 2023 maximum is $6,500. The catch-up contribution remains $1,000.

Mixing Roth and Traditional

The contribution limits are the same for Roth and traditional versions of 401(k)s and IRAs.

If you want to contribute to both a Roth and a traditional 401(k), the maximum amounts remain the same. You can split your contributions between accounts in any way you like. 

One financial strategy, for those who want to maximize their tax-advantaged savings: Open both types of Roth accounts. You can invest up to the combined allowable limits in a Roth 401(k) and a Roth IRA.  

Roth IRA Income Limits

With Roth IRAs, there are limits to what you can contribute or even whether you can have one at all, based on your income. Generally, the higher it is, the more restricted your contributions.

However, the Roth 401(k) has no income limits. That means you don’t have to worry about your access to a Roth account phasing out as your income rises.

Overall contributions to a Roth 401(k) can't exceed your compensation, of course. For 2022, the combined total of employee and employer contributions cannot exceed the lower of $61,000 or 100% of the employee’s pay ($67,500 if you’re aged 50 or older).

To have a Roth IRA. your earned income must not exceed certain limits. Your ability to contribute phases out to zero over several income steps.

For 2022, the income phase-out starts at $129,000 for individual tax filers and ends at $144,000. For taxpayers who are married and filing jointly as well as widowed people the phase-out for 2022 ranges from $204,000 to $214,000.

For 2023, the income phase-out for individuals begins at $138,000 and ends at $153, 000. For married people and widowed people, the range is $218,000 to $228,000.

Roth Rollovers

If you are getting a new job, you might be considering rolling over your current Roth 401(k) into a new or existing Roth IRA account.

When it comes to rollovers, there is no contribution limit; you can transfer whatever is in your account. Just be sure to have the old account's trustee or manager directly roll over the money to the new account, or at least make sure the check is made out to the new manager as the account trustee.

If the money is paid into your hands personally, you could be required to pay a tax penalty.

What Is the Contribution Limit for a Roth IRA?

For 2022, individuals can contribute up to $6,000, or up to $7,000 if they are age 50 or older. However, the amount you invest through IRAs in a given year cannot exceed your earned income.

For 2023, the maximum is $6,500. The catch-up contribution remains $1,000.

What Is the Contribution Limit for a Roth 401(k)?

The IRS allows employees to invest up to $20,500 per year in 2022, although you can contribute an additional $6,500 if you're age 50 or older. The same limits apply to employees of a non-profit organization who have a 403(b) plan.

The 2023 maximum contribution to a Roth 401(k) or 403(b) is $22,500. The catch-up contribution is $7,500.

Can You Contribute to a 401(k) and a IRA?

Yes. The contribution limits for 401(k) plans are separate from the limits for IRAs. That means you can invest up to the maximum in each of the types of accounts.

The Bottom Line

Contribution limits on all tax-advantaged accounts are indexed to inflation. This means the IRS re-evaluates and revises the maximum amounts people can contribute to IRAs and 401(k)s each year.

If you’re contributing near the maximum allowed, be sure you stay on top of the annual limits.

Article Sources
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