The short answer is yes, you can contribute to both a Roth IRA and an employer-sponsored retirement plan, such as a 401(k). In fact, there are two advantages to doing so:
- It allows you to increase the savings you can legally put into qualified retirement accounts.
- It can help lessen your tax liability during retirement.
Knowing how to do both effectively can help you live the life you want during your retirement years. Be sure to seek out professional tax advice on this type of decision and discuss your plans with your tax advisor.
Increase your savings
The first point is simple to see, given that each vehicle has an annual contribution limit. For a 401(k), the 2024 contribution limit is $23,000, with an additional $7,500 “catch-up” allowance if you’re 50 or older. For a Roth IRA, the maximum annual contribution for 2024 is $7,000, or $8,000 if you’re 50 or older. Contributing to both enables you to put away up to $30,000 ($38,500 if 50 or older) each year, according to the IRS.
Lessen your potential tax liability
The second advantage of contributing to both a Roth IRA and a 401(k) is less obvious, but not less valuable. Although you may believe you’re better off sticking to a 401(k), paying taxes on your money when you’re ready to spend it in retirement instead of during your peak earning years, that may not be true. You can’t be sure what tax bracket you’ll be in at retirement, and you have no idea what the tax rates will be.
It is prudent to hedge your bets and diversify your holdings. If you have some retirement savings you’ve already paid taxes on and some you haven’t, you can plan your distributions to help lessen your tax liability, based on your circumstances at the time. Again, be sure to talk to a tax advisor about your options and circumstances.
Plan the details carefully
Of course, before contributing to a Roth IRA account, consider contributing enough to your employer’s retirement plan to take full advantage of any matching contribution your employer offers. Otherwise, you’re turning down free money.
To help plan for your retirement, consider working with a financial advisor who focuses on helping you make informed choices around every part of your financial life.