There are some contribution and deduction limits, but the IRS permits you to save money to both.
Tax and Distribution Factors
A Roth IRA is a great choice if you’re already saving regularly to a 401(k) and you’re looking for a way to save even more. The money in your 401(k) will be taxed at the time you take it out, because you didn’t pay taxes on your contributions. Roth distributions of principal will not be taxed, because you’ve already paid taxes on this money. A Roth IRA can be a great savings option for other goals, like buying a house or paying for a child’s college costs. The value of your Roth contributions can be withdrawn at any time without any taxes or penalties, because you already paid taxes on that money at the time you earned it. You must begin required minimum distributions (RMDs) from a 401(k) or a traditional (non-Roth) IRA at age 72 (age 70 1/2 you reached 70 1/2 before January 1, 2020). But there are no required minimum distributions from a Roth IRA account until after the owner’s death. The account’s beneficiaries may be required to take RMDs in order to avoid penalties.
Eligibility and Contribution Limits
There are no modified adjusted gross income (MAGI) limits for saving to a 401(k), so you can make use of this type of account, no matter how much or how little money you earn. You might not be able to save the full amount allowed each year to a Roth IRA, or you may not be able to contribute at all if you earn above certain MAGI limits. The amount of your contribution also depends on your income tax filing status.
$204,000 if you’re married and filing a joint return or are a qualifying widow or widower$0 if you’re married and filing a separate return, and you lived with your spouse at any time during the year$129,000 if you have any other filing status
You can save $19,500 in your 401(k) in 2021 if you’re age 49 or younger, increasing to $20,500 in 2022. You can save an additional $6,500 if you’re age 50 or older.
Other Retirement Account Combos
You can save to both a traditional IRA and a Roth IRA if you don’t have a 401(k) through work, as long as your combined savings don’t exceed the $6,000 or $7,000 annual limit. It might not make sense to save to a traditional IRA and 401(k) in the same year, because these two kinds of accounts are designed to do the same thing. The only difference is that IRAs have much lower contribution limits than 401(k)s.
How Much to Save
It makes sense to take full advantage of any employer matching contributions to a plan at work before putting money into an IRA. Save at least as much as the matching percentage if your employer matches your 401(k) contributions. One good rule of thumb is to save 10% to 15% of pretax income. Consider maxing out a Roth IRA after you reach this point, or at least setting aside as much as you can into this type of account throughout the year. The tax benefits will pay off, particularly if you expect your income tax rate to rise over time.
