Since publishing The Ultimate Guide to Traditional and Roth 401(k) and IRA Retirement Accounts, I’ve received a number of questions about retirement plans that weren’t covered in the article. I’ve responded to these questions in the comments to the article, but I thought it would be helpful to discuss some of them in a separate article. So here are some of your questions, along with my responses. I’ll add this information to The Ultimate Guide so that everything is in one place.
James asked whether he can put a full $15,500 into his 401(k) and then contribute an additional $4,000 in a Roth IRA in the same tax year?
Yes. Assuming that your income qualifies you for a Roth IRA (see The Ultimate Guide), then you can contribute to both a 401k and a Roth IRA.
Ben asked who monitors his contribution limits if he changes jobs during the year and what happens if his contributions from both jobs combined exceed the $15,500 limit.
The IRS makes clear that you are responsible for making sure your contributions to multiple plans do no exceed the limits. When I changed jobs a few years ago, I notified my new employer of the amount I had already contributed that year, and they then stopped my contributions when I reached the limit. If you go over, you have until tax day of the following year to remove the excess and any earnings generated from the excess. If you don’t remove the excess, you’re taxed on the amount AND you’re taxed on it again when you eventually withdraw it. On top of that, the excess contribution can disqualify the plan.
Snoop911 asked what happens if you contribute to a Roth IRA on January 1, but then later in the year, it turns out you make over the limit for Roth IRA eligibility.
As I told Snoop911, did you ever wonder why you have until tax day of the next year to make an IRA contribution? However, if you do contribute earlier and then make too much to qualify for a Roth IRA, you have to get your money out before the due date (including extensions) for filing your tax return for the year. You must also withdraw any earnings attributed to the excess contribution. And if you don’t get the money out in time? 6% excise tax! IRS Publication 590 (pdf) has more details.
Snoop911 also asked about the contribution limits to a Roth IRA.
As with a traditional IRA, the 2007 limits are $4,000 if you are 49 or younger, and $5,000 if you are 50 or better (ok, 50 or older, but as I get closer to 50, I prefer better)
There were some other great questions, so I’ll update The Ultimate Guide shortly and will let you know when the updates have been added. And as a reminder, the rules and regulations for retirement accounts can be tricky, and I’m not a retirement account or tax specialist. So you should always consult your plan administrator or other specialist before making any decisions.