One of the most common questions among retirement savers is whether they can have and invest in both a 401(k) and a Roth individual retirement account (IRA) each year. The good news is that, yes, you can have both a 401(k) and a Roth IRA. Having one account doesn't stop you from having the other type of account.
Your eligibility for both of these accounts depends on the limits and restrictions imposed on them, but many people are able to invest in both.
- You can have a 401(k) and a Roth IRA at the same time if you're eligible.
- To participate in a 401(k), it must be offered to you at work, and you'll have to stick to the contribution limits.
- To be eligible for a Roth IRA as well, you'll need to make sure your income fits the requirements.
- If you can, having both accounts will let you maximize your retirement savings and take advantage of the unique benefits of each account type.
Investing in Both a 401(k) and a Roth IRA
A 401(k) is a qualified plan that's set up by an employer. It lets eligible workers invest a portion of their wages into an account. You make pre-tax contributions (from earned dollars that aren't taxed) to a traditional 401(k) through deductions from your paychecks.
Roth IRA plans are those that you invest in with after-tax dollars. These are private plans, not offered by employers, so you have to open an account on your own with a banking or financial institution.
If you have a 401(k) through work, you can still open a Roth IRA—as long as you meet the income requirements. And if you have a Roth IRA already, you can still elect to participate in a 401(k) through your job. What matters is that your accounts are set up properly and that you qualify to participate in the plan you choose.
401(k) Pros and Cons
Pre-tax contributions reduce your taxable income
Higher contribution limits
No income limit to participate
May have an employer match
You are taxed on your withdrawals
Early withdrawal penalties
- Pretax contributions reduce your taxable income: You can deduct the contribution from your taxable income because 401(k) plans are tax-deferred accounts that you pay into with pretax dollars. This lowers your tax liability in the present.
- Higher contribution limits: You can contribute up to $20,500 in your 401(k) for 2022, compared to $6,000 for a Roth IRA (if you're under age 50).
- No income limit to participate: You aren't restricted from contributing to or participating in a 401(k) just because you have a high income.
- May have an employer match: Some employers match their employees' contributions, helping you reach your retirement goals faster.
- You are taxed on your withdrawals: Both your contributions and their earnings are subject to taxes when you take the money out.
- Early withdrawal penalties: The withdrawal will also be subject to an early-withdrawal penalty of 10% if you take it before age 59 1/2, with certain exceptions.
Who Is Eligible to Participate in a 401(k)?
Any employee who is at least 21 years old and has one year of service can invest in a 401(k). There's no income limit for plan participation, unlike with some other retirement plans. For example, you could earn $500,000 and contribute to your plan.
401(k) Contribution Limits
There are limits on the amount you can invest in this type of plan each year. The maximum amount depends on your age. It varies from year to year, based on any increase in the cost-of-living index, which reflects the inflation rate.
The most you can contribute to your 401(k) plan in pretax contributions and designated Roth 401(k) contributions is $19,500 in 2021 and $20,500 in 2022 if you're under the age of 50. You can contribute an additional $6,500 in catch-up contribution if you're age 50 or over.
This limit doesn't factor in any money your employer might put in on your behalf, such as matching contributions. The total annual limit, including employee and employer contributions to plans maintained by a single employer, is $58,000 ($64,500 including catch-up contributions for those age 50 or older) in 2021. This increases to $61,000 in 2022, or $67,500 including catch-up contributions.
Designated Roth 401(k) contributions aren't the same as Roth IRA contributions. You make designated Roth contributions into a separate Roth account of your 401(k) plan. They count toward the limit.
Roth IRA Pros and Cons
Tax-free withdrawals after age 59 1/2
Withdraw original contributions at any time
No required minimum distributions during life
Annual contribution limit is much lower
No employer match
- Tax-free withdrawals after age 59 1/2: You don't have to pay any taxes on either the contributions or the earnings with a Roth IRA when you take the money out, as long as you've held the account for five years. Again, you must wait until age 59 1/2 to take the earnings.
- Withdraw original contributions at any time: Your original contributions (but not the earnings) can also be withdrawn tax-free at any time before you reach retirement.
- No required minimum distributions during life: No distributions from a Roth IRA are required until after the account owner's death.
- Annual contribution limit is much lower: The maximum you can contribute to a Roth IRA annually is $6,000 in 2022 ($7,000 if you're age 50 or older).
- No employer match: As it is an individual retirement account and not tied to any employer, there are no employer matches.
Who Is Eligible for a Roth IRA?
Unlike a 401(k), your eligibility to invest in a Roth IRA and your limits are determined first by your earning status, then by your adjusted gross income (AGI) and your age. The basic rule for a Roth IRA is that you (or your spouse if you're filing jointly) must be paid a wage or have some type of income from working.
Roth IRA Limits
Your modified AGI or MAGI can't exceed certain thresholds that depend on your tax-filing status if you're going to put money into a Roth IRA. You can make the full contribution in 2021 if you earn less than $125,000 as a single filer or less than $198,000 as a couple filing jointly. This limit increases to $129,000 for an individual or $204,000 for a married couple in 2022.
You can contribute up to $6,000 in 2021 and 2022 if you're under age 50, or $7,000 if you're age 50 or over. This assumes that you've earned at least that much income. Individuals who meet these income rules can legally have and invest in both a 401(k) and a Roth IRA.
You would qualify for only a reduced contribution to a Roth IRA at the $125,000 income level in 2021. Your chance to contribute to a Roth IRA ends at $140,000. In 2022, these ranges change to $129,000 through $144,000.
In 2021, married couples filing jointly can make a reduced contribution at $198,000. You can't have a Roth IRA after a couple's income reaches $208,000. In 2022, these ranges change to $204,000 through $214,000.
Individuals who make more than these limits can't have both a 401(k) and a Roth IRA—only a 401(k).
The amount you invest in a Roth IRA can't exceed the taxable compensation you receive for the year.
Which Retirement Account Is Better?
People who earn average incomes will often find that they can invest in both a 401(k) and a Roth IRA. You can contribute to both accounts as long as you meet the eligibility rules for both.
Contributing to a 401(k) is great for socking away more money than you're able to with a Roth, and you can enjoy the tax deduction, too. Plus, if your employer offers a 401(k) match, that's more money for retirement that you didn't have to contribute yourself.
Invest at least the minimum amount in your 401(k) to qualify for your employer's matching program, if one is offered.
On the other hand, the flexibility of a Roth can come in very handy. Being able to withdraw your contributions without a penalty lets you save for other goals, such as buying a house or paying for a child's college education. Some people even use Roth IRAs as emergency savings accounts.
Investing in both together lets you make the most of your retirement savings. It also allows you to save more than you'd be able to if you had one account or the other. Still, if you don't qualify to have both together, it helps to have an alternative.
Alternative to a 401(k) and a Roth IRA
If your income is too high for a Roth IRA, you can invest in a traditional IRA instead to supplement your 401(k) contributions.
You must still have taxable earnings to be eligible for a traditional IRA, but there's no income limit. You could have both plans, even as a high earner. These accounts work like 401(k) accounts in that your contribution is either fully or partially deductible in the present. You pay taxes on the money you invest and on earnings upon withdrawal.
You can take a full deduction up to your IRA limit if you don't also participate in a 401(k) or another retirement plan at work, or if you have a 401(k), but your modified AGI is $66,000 or less as a single filer in 2021. This increases to $105,000 or less as a married couple filing jointly when the spouse contributing to the IRA also has a work-related 401(k). In 2022, these limits increase to $68,000 and $109,000, respectively.
In 2021, you can claim a reduced deduction if your income is more than $66,000 ($68,000 in 2022) or more than $105,000 ($109,000 in 2022) for a single filer or couple with a spouse enrolled in a 401(k) at work.
You don't qualify for any deduction if you earn $76,000 or more as a single filer or $125,000 or more as a couple with a spouse enrolled in a 401(k) at work in 2021. These limits increase to $78,000 for single filers and $129,000 for couples in 2022.
The Bottom Line
It makes sense to contribute to both these accounts if you qualify, you can afford it, and you want to invest more than the 401(k) or Roth IRA limits. Both accounts offer unique incentives when they're combined, allowing you to make the most of your savings.
Your participation in one of the two plans won't prevent you from saving in the other. You can use a traditional IRA with your 401(k) even if you can't have a Roth IRA because of your income. So, go ahead—maximize those retirement savings.
Frequently Asked Questions (FAQs)
What is the difference between a Roth IRA and a 401(k)?
Roth IRA and 401(k) accounts are taxed differently. Roth IRA contributions aren't tax-deductible, so they are essentially taxed before you put them in. Your investment grows tax-free, and you don't pay taxes when you take distributions. Contributions in a 401(k) are pre-tax, meaning you can fully deduct them for the year you make them, then you'll pay taxes on the contributions and the growth when you take distributions.
Where should I invest after maxing out a Roth IRA and a 401(k)?
If you have access to a health savings account (HSA), this is a great and lesser-known third option for retirement investing. If you accumulate more money than you need for medical expenses in your HSA, you can withdraw this money for any reason with no penalty after age 65. You'll just pay ordinary income tax on your withdrawals if you don't use them for medical expenses. After that, you might want to look into standard, taxable investment accounts.