Yes, you can contribute to both a Roth IRA and a 401(k), provided you don’t exceed annual contribution limits for each account.
Determining whether to contribute to a Roth IRA, 401(k), or both can be an important step in planning for your retirement. This guide explains the key differences, including tax advantages, employer contributions, and investment options.
Eligibility requirements are the first consideration when contributing to a Roth IRA and a 401(k). For Roth IRA contributions, your eligibility is determined by your income.1 Specifically, if your modified adjusted gross income (MAGI) exceeds certain thresholds, your ability to contribute to a Roth IRA may be reduced or eliminated. However, there are no income limits for contributing to a 401(k), making it accessible to anyone with earned income.2
IRS rules do allow for contributions to both a Roth IRA and a 401(k), provided you adhere to the annual contribution limits for each account.1 2 This means you can take advantage of the higher contribution limits of a 401(k) while also benefiting from the tax-free growth of a Roth IRA. This dual approach can be a strategy for maximizing your retirement savings.
The advantages to contributing to both accounts present some key benefits, such as:
Balancing contributions between a Roth IRA and a 401(k) requires careful planning. You might start by contributing enough to your 401(k) to receive the full employer match, which is essentially free money, if your employer offers this. Once you’ve secured the match, consider maxing out your Roth IRA contributions, if you’re eligible.
Investing in both a Roth 401(k) and a Roth IRA is not only possible but may be beneficial for those looking to diversify their retirement accounts. A Roth 401(k) combines features of both the Roth IRA and the traditional 401(k), offering the tax-free withdrawal benefits of a Roth IRA with the higher contribution limits of a 401(k).4 This dual approach could allow for greater flexibility in managing your retirement savings.
One of the key advantages of having both accounts is that the contribution limits for each do not affect the other. This means you can contribute up to the maximum limit in both accounts independently. For high-income earners, this provides an opportunity to increase their tax-free retirement savings.
Using both accounts can be potentially advantageous for high-income earners who want to maximize their tax-free retirement savings. By contributing to both a Roth 401(k) and a Roth IRA, you may be able to take full advantage of the benefits each account offers. This strategy can increase your retirement savings as well as provide tax diversification, which may be beneficial in managing your taxable income during retirement.
A Roth Individual Retirement Account (Roth IRA) is a type of retirement savings account that allows you to contribute after-tax dollars, and the money grows tax-free over time. Unlike traditional IRAs, where you get a tax deduction upfront, with a Roth IRA, you pay taxes on the money you contribute now. The advantage is that you won’t have to pay taxes on the withdrawals you make in retirement, provided certain conditions are met. This can be particularly beneficial if you expect to be in a higher tax bracket when you retire or if you want to leave tax-free income to your heirs. The tax-free growth and withdrawals make Roth IRAs a tool for long-term retirement planning.5
When it comes to Roth IRAs, understanding the contribution limits and income thresholds is crucial. For the 2025 tax year, the annual contribution limit is $7,000, or $8,000 if you are 50 or older, thanks to catch-up contributions. However, your ability to contribute to a Roth IRA is subject to income limits. If your modified adjusted gross income (MAGI) is below $150,000 for single filers or $236,000 for joint filers, you can contribute the full amount. If your income exceeds these thresholds, your contribution limit is gradually reduced, and if it surpasses a certain point, you may not be able to contribute at all.6
For those who find themselves above the income limits, there is still an option to possibly benefit from a Roth IRA through a backdoor Roth IRA. This process involves converting a traditional IRA to a Roth IRA, allowing for tax-free growth and withdrawals in retirement. However, it’s important to note that you will need to pay taxes on the converted amount in the year of the conversion.7 Understanding these limits and options can help you make the most of your retirement savings strategy.
A 401(k) plan is a type of employer-sponsored retirement plan that allows you to contribute a portion of your paycheck to a tax-deferred investment account. Contributions to a 401(k) are made with pre-tax dollars, which means they are deducted from your paycheck before income taxes are applied, effectively reducing your taxable income for the year. This tax-deferred growth means you won’t pay taxes on the money until you withdraw it in retirement, potentially allowing your investments to grow more quickly.8
One of the features of a 401(k) plan is the potential for employer-matching contributions. Some employers offer to match a portion of your contributions, which is essentially free money added to your retirement savings. This employer match can boost your retirement fund over time. Additionally, 401(k) plans may come with higher contribution limits compared to IRAs, allowing you to save more each year. For 2025, the contribution limit is $23,500, or $31,000 if you are 50 or older, thanks to catch-up contributions. This combination of tax advantages and higher contribution limits makes 401(k) plans a cornerstone of many retirement savings strategies.9
When comparing Roth IRAs to 401(k)s, the first major difference lies in how they are taxed. Both Roth IRAs and 401(k)s are popular retirement accounts, each with its own set of rules and benefits. Contributions to a Roth IRA are made with after-tax dollars, meaning you pay taxes upfront and enjoy tax-free withdrawals in retirement. On the flip side, 401(k) contributions are used as a tax deduction and made with pre-tax dollars, reducing your taxable income now, but you’ll pay taxes on withdrawals later.
Another significant difference is employer matching. A 401(k) often comes with the benefit of employer matching contributions, which is essentially free money added to your retirement fund. This feature is exclusive to 401(k)s, as Roth IRAs do not offer employer matching.
Withdrawal rules also differ between these accounts. With a Roth IRA, you can withdraw your contributions at any time without penalties, making it more flexible in terms of access to your funds. 401(k)s, however, impose penalties for early withdrawals unless you meet specific conditions.10
Investment flexibility is another key difference. Roth IRAs typically offer a wide range of investment options, including stocks, bonds, mutual funds, alternative assets, and more. In contrast, the investment choices within a 401(k) are often limited to what your employer’s plan offers. These differences can help you decide which account best suits your retirement goals.
The contribution limits in 2025 are another critical aspect to consider. The Roth IRA limit of $7,000, or $8,000 if you are 50 or older is a lot lower than 401(k)s, where the limit is higher at $23,500, or $31,000 for those 50 and above. These limits guide how much you can save annually in each account.
Prioritizing contributions can be a strategic way to potentially maximize your retirement accounts. Start by contributing to your 401(k) up to the point where you receive the full employer match, if available. This is free money that may boost your retirement savings. Once you’ve secured the employer match, shift your focus to maxing out contributions to your Roth IRA, provided you meet the income limits.
When it comes to investing strategies, a Roth IRA offers more flexibility and is potentially ideal for growth-oriented, investments. You may be able to maximize the growth potential of these funds through qualified distributions, which are tax-free if certain conditions are met. You may want to consider investing in stocks, mutual funds, exchange-traded funds (ETFs), or alternative assets like private equity that have growth potential. For your 401(k), you might want to consider more investments like target-date funds or the options provided by your employer’s plan. Keep in mind that 401(k)s are subject to required minimum distributions (RMDs) starting at age 73, which mandate withdrawals and could impact your investment strategy.11
Avoiding pitfalls is crucial in retirement planning. Monitor your contribution limits closely to avoid penalties. Over-contributing to either account can result in significant penalties and tax issues. Regularly review your investment allocations and adjust them as needed to ensure they align with your retirement goals and risk tolerance.
Remember, the key to successful retirement plan planning is ongoing review and adjustment. Life changes, financial markets fluctuate, and your retirement goals may evolve. Keeping a close eye on your accounts and making necessary adjustments will help you stay on track for retirement.
Deciding between a Roth IRA and a 401(k) depends on your individual circumstances and how you want to manage your retirement accounts. If your income is within the eligibility limits for a Roth IRA, and you prefer having a wide range of investment options, then prioritizing a Roth IRA might be the best choice for you. This account offers tax-free growth and withdrawals, which can be beneficial in retirement.
On the other hand, if your employer offers matching contributions, a 401(k) may be your first priority. The higher contribution limits and the benefit of employer matching make the 401(k) a tool for building your retirement savings. Additionally, there are no income limits for contributing to a 401(k), making it accessible to everyone with earned income.
For some, the best approach is to use both accounts. By contributing to both a Roth IRA and a 401(k), you can enjoy the benefits of tax-free growth and withdrawals from the Roth IRA, while also taking advantage of the higher contribution limits and employer matching of the 401(k). This strategy provides flexibility and can help you build a retirement portfolio.
Understanding the key differences between a Roth IRA and a 401(k), and knowing that you can contribute to both types of retirement accounts, opens up a world of possibilities for potentially maximizing your retirement savings. By strategically balancing your contributions and investment choices, you may be able to take advantage of the benefits each account offers.
As you move forward with your retirement planning, remember to regularly review and adjust your strategy to align with your evolving goals and financial situation.
You can indeed contribute to both types of retirement accounts, a Roth IRA and a 401(k), as long as you meet the eligibility requirements and stay within the annual contribution limits. This may allow for diversified retirement savings.
Having both types of retirement accounts, a Roth IRA and a 401(k), may provide tax diversification, but remember to consult your tax advisor for your specific situation.
Exceeding contribution limits for your retirement accounts may result in penalties and potential tax complications. Therefore, it is essential to carefully track your contributions to avoid such issues.
Rolling over a 401(k) to a Roth IRA may be beneficial, but it requires careful consideration of your individual circumstances and potential tax ramifications for your retirement accounts. It is advisable to consult a financial advisor for personalized guidance.
Roth IRA contribution limits for 2025 are $7,000 ($8,000 if aged 50 or older), whereas 401(k) contribution limits are significantly higher at $23,500 ($31,000 if 50 or older). It’s important to consider these differences when planning your retirement accounts.13
Disclaimer
This material, provided by Linqto, is for informational purposes only and is not intended as investment advice or any form of professional guidance. Before making any investment decision, especially in the dynamic field of private markets, it is recommended that you seek advice from professional advisors. The information contained herein does not imply endorsement of any third parties or investment opportunities mentioned. Our market views and investment insights are subject to change and may not always reflect the most current developments. No assumption should be made regarding the profitability of any securities, sectors, or markets discussed. Past performance is not indicative of future results, and investing in private markets involves unique risks, including the potential for loss. Historical and hypothetical performance figures are provided to illustrate possible market behaviors and should not be relied upon as predictions of future performance.