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Can I max out my Roth IRA ($5000) and also contribute to my employers Roth 401K? I am sorry if this question is not within the scope of this board, I have looked everywhere but all I can find is articles comparing the two.
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Can I max out my Roth IRA ($5000) and also contribute to my employers Roth 401K? I am sorry if this question is not within the scope of this board, I have looked everywhere but all I can find is articles comparing the two.

It's probably more of a question for the Tax Strategies board http://boards.fool.com/messages.asp?mid=27411802&bid=100... since the answer is contained in IRS Pub 590 http://www.irs.gov/pub/irs-pdf/p590.pdf

The only restriction to contributing to a Roth IRA is your MAGI (Modified Adjusted Gross Income), based on your filing status. Details on how to calculate your MAGI are found in IRS Pub 590.

Contributions to either a traditional or Roth 401(k) do not affect the ability to contribute to a Roth IRA, other than if your MAGI is on the edge of qualifying for a Roth IRA, contributing to a traditional 401(k) can help you decrease your MAGI so that you are eligible.

AJ
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I had wondered about that as well. Your income does make a difference, and you will have to figure out all of that, but the 2 are unrelated. I was getting caught up on the "Roth" term found in both of them. Ultimately, the Roth IRA follows the IRA rules and the Roth 401k follows the 401k rules. You can max out both of them (assuming you meet the qualifications): IRA - $5,000 under age 50 or $6,000 over age 50; 401k - $16,500 under age 50 or $22,000 over age 50.

IRA limits - http://beginnersinvest.about.com/cs/iras/a/iracontribution.h...
IRA types - http://beginnersinvest.about.com/cs/iras/f/tradvsrothira.htm...
Roth 401k info - http://www.smartmoney.com/personal-finance/retirement/unders...
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Can and should are two different questions.

I am a bit skeptical about how good a Roth will be for most people because they can end up taking paying taxes now in their prime earning years at a relatively high marginal tax. If the tax laws in retirement are anything like they are now, then you will really want to have at least $50K or so in taxable income because of the standard deduction and the low tax rates for the first segment of your income. Unless you are on track to have that much taxable income in retirement then I would favor having a larger taxable IRA/401k for your core retirement savings.

Even if you are on a high income career track, I would still make sure that you fund your core “I’m not going to eat dogfood” retirement money first before worrying about retirment taxes and a Roth. The problem is that “life happens” and a career setback or health problem could cause you to retire on less than you expect. I’ve seen this happen a number of times and it isn’t always due to bad events. If you get to be in your 40’s or 50’s and are able to retire early comfortably and safely with a modest lifestyle then working for a few more decades just to be richer when you are old may not seem worthwhile.

If you do get to retirement and are exceptionally well off then you can still roll the money into a Roth.

It is not a clear cut choice and the idea solution is to have a mixture of account types. Even if you are anywhere near rich, having some money in a Roth will be nice for help in years that you have higher expenses, like when you buy a car or house.

Greg
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Thank you for all the reply posts, clearly answering my question. FYI: I am lucky because my MAGI is significantly reduced by the Foreign Earned Income Exclusion.
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I am lucky because my MAGI is significantly reduced by the Foreign Earned Income Exclusion.

The FEIE reduces your AGI. But it must be added back into your AGI to determine your Roth IRA eligibility. It is one of the modifications necessary to get to Modified AGI (MAGI). The details are in IRS Publication 590. (Page 61 of the 2008 version.)

You might need to re-think your ability to contribute to a Roth IRA.

--Peter
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