Can I Contribute to Both a 401(k) & a Roth IRA?

You Can Contribute to a 401(k) and a Roth IRA

Saving for retirement is important at any age, as Michelle has found out. At the age of 35, she has learned that she has many options available to her that will help her prepare for her retirement years. Often times, people will choose to open an IRA retirement account, either a traditional or a Roth IRA. Michelle has made this choice. Seeing that more people are choosing a Roth account because it provides a source of tax-free income upon retirement, Michelle has decided to go forward and open a Roth account. If she already had a Roth IRA account, she would have been well on her way to saving. However, it is not too late. Even though Michelle did not open a Roth IRA prior to now, she has been contributing to her company sponsored 401(k) plan. Michelle did have to take some time to ask whether she was allowed to contribute to both a 401(k) and a Roth IRA. In short, the answer is yes. Actually, Michelle has been advised to do just that.

Contribute to Both 401(k) and Roth IRA: Know Your Limits

Michelle has learned the facts of a Roth IRA and she knows that the annual maximum contribution limits are different for each type of retirement plan. In 2009, the maximum amount she can contribute to her 401(k) plan is $16,500, if she is under the age of 50, which she is. If Michelle were older than 50, she would be allowed an additional $5,500 per year as a catch-up amount. It should be noted that not every employer will allow you to use a catch-up contribution, so Michelle would need to ask her employer about this to find out if she would be allowed that extra amount. Financial advisors have recommended that Michelle contribute as much as she can afford into her current 401(k) plan.

Michelle must also keep in mind that these figures are for her contributions only. They do not include any contribution made to the account by her employer. The contribution limits for a 401(k) plan can change each year, so make Michelle must make sure she is always aware of what the limits are.

Since Michelle will be opening a Roth IRA, she must also know what the contribution limits are for this type of retirement plan. The Roth IRA contribution limits are completely different from a 401(k). In fact, as she found out, the limit is significantly less. Currently, in 2009, anyone under the age of 50 is allowed a maximum of $5,000 per year. There is again a catch-up amount for those who are over 50. This amount is $1,000, totalling $6,000 per year. This means, seeing as Michelle is only 35, she would be able to contribute $5,000 to her new Roth IRA account.

Contributing to Both Retirement Accounts is Beneficial

Michelle has been advised to contribute to both of her retirement savings plans. At first, she thought it would be too much money. While it is highly recommended to contribute the maximum allowable amount, Michelle has been informed that this is not required. She may choose how much to contribute to each account, thus having control of her contributions and being able to budget her accounts. Michelle already knows that a 401(k) plan is a powerful tool. In her case, her 401(k) plan involves a match from her employer. This is a benefit of the 401(k) plan and the amount in the account can accumulate quickly. On the other hand, she has now learned that her newly opened Roth IRA, even though it has lower contribution limits, will provide her with tax-free IRA retirement income when she retires.

Each retirement plan has its pros and cons. As long as Michelle is financially able to contribute, she can contribute to both a 401(k) and a Roth IRA. Both of these accounts are critical to the proper planning for retirement. Again, it is never too late to begin saving. Michelle has realized the importance of retirement planning and savings and she knows that the more she saves now, the more she will have available when she retires. IRA and retirement plan investing are very important tools. As long as Michelle continues to be able to contribute to more than one type of retirement account, she should. It may seem like a long way off, but retirement comes quickly, and the better she prepares and saves now, the better her financial situation will be later in life.

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Rocco Beatrice, CPA, MST (Master of Science in Taxation), MBA (Master of Business Administration), BSBA (Management/Accounting), CWPP (Certified Wealth Preservation Planner), CMMB (Certified Mortgage Broker), CAPP (Certified Asset Protection Planner), Managing Director, Estate Street Partners, LLC. Mr. Beatrice is an asset protection, award-winning trust, estate planning and tax expert.

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