Leveraging Both a 401(k) and a Roth IRA for Retirement

So the question is “Can I contribute to both a 401k plan and a Roth IRA”? Yes is the short answer, however, there are a few things employees must take into account when considering contributions to a 401(k) or 403(b) plan as well as a Roth IRA.

Understanding a Roth IRA

An IRA stands for Roth Individual Retirement Arrangement (while many say “Account”) and the financial vehicle functions as an individual retirement plan. A Traditional IRA allows individuals to take a tax deduction on amounts contributed to the fund; however, with a Roth IRA such deductions will not be possible. If you meet the requirements, your money will accrue without tax liability and can be withdrawn without taxation.

What is the Eligibility to Contribute to a Roth IRA?

Your contributions to an IRA account hinge on your income. Contribution limitations on income, a legal specification referred to as a “phase-out range”, determines how much to can put towards the account if your income falls within that range.

What are the Phase-Out Ranges?

  • If your tax filing status is Single or Head of Household, that range is $95,000 – $110,000.
  • If your tax status is Married Filing Jointly that range will be $150,000 – $160,000
  • If you are Married Filing Separately, then that range is only $0 – $10,000

How to Make the Maximum Contributions

Maximizing your retirement accounts is a simply process if your income meets or falls below the ranges specified above. For 401(k) and 403(b) plans, contributions in 2010 can be as much as $16,500 for or up to $22,000 if you are over the age of 50. Roth IRA contributions, cap out at $5,000 for 2010 or up to $6,000 if you are over the age of 50.

Making the Most of Your Retirement Planning

One way you can maximize your retirement nest egg involves just enough contribution funds to a 401k to qualify for the most matching funds on behalf of your employer. Next, you will want to make a comparison of your investments between the 401(k) plan and the Roth IRA investment alternatives. Ask yourself if the investments in the 401(k) will help you stay on track and realize your retirement goals.

If the answer is yes, then make the maximum contributions to the 401(k) to leverage the maximum contributions from your employer. However, if the investments in the 401(k) seem to hinder or remain stagnant rather than assist you in your retirement goals, then contribute the rest of your money set aside for retirement into a Roth IRA.

And it would be a terrible thing not to mention the great tax loophole that the government is offering for high-income earners this year. They are allowing everyone (regardless of income level) the opportunity to convert a traditional IRA to a Roth IRA. With the some of the tax benefits of the Roth, this is definitely something worth considering.

The Final Scoop on Investing in Retirement

Usually, the best option is to leverage the maximum contributions to both the 401(k) plans and the Roth IRA when possible. Benefits include reducing your tax liability annually by contributing to your 401(k) or 403(b) plan. With the Roth IRA, you will have access to Tax-Free income when you retire. This approach offers you the best possibilities in maximizing your retirement income while allowing flexibility in planning your budget once retirement approaches.

This article was written by Bob, who runs a Christian Finance blog at ChristianPF.com.

Published or Updated: April 3, 2014

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