Can you contribute to a 401 (k) and an IRA at the same time?
If you want to maximize your savings opportunities, can you contribute to your 401 (k) at work? and to an IRA (Individual Retirement Account) at the same time? Forbes.com readers want to know.
My daughter has both a 401 (k) at work and also contributes to a Roth IRA. Are there any contribution limits here? She is 54 years old…. Is there a simple answer or understandable IRS publication covering this?
Contribute to both?
Yes indeed the law allows contributions to both a 401 (k) plan at work and an IRA, and yes there are limits, and yes there are understandable publications from the IRS that cover this subject.
The IRS lists IRA FAQs on its website page in response to the question “Can I contribute to a Traditional or Roth IRA if I am covered by a workplace pension plan?”:“ Yes, you can contribute to a Traditional and / or Roth IRA even if you participate in an employer-sponsored retirement plan (including a SEP or SINGLE IRA). ”
Contribution limits are not reduced to a Roth or traditional 401 (k) participation-based IRA. They are, however, reduced for Roth IRAs (not traditional IRAs) based on income (not 401 (k) participation).
Roth IRA contribution limits
As noted in my column on Roth IRA contribution limits, the maximum a person can contribute to a Roth IRA in 2022 is $ 6,000 ($ 7,000 for those 50 and over). The extra $ 1,000 for people 50 and over (like PH’s daughter) is called a “catch-up” contribution.
Filing status and income
When it comes to contribution limits, not everyone can contribute to a Roth IRA due to phase-outs due to income limits. In contrast, there is no income limit on contributions to a traditional tax-deferred IRA.
The maximum contribution of PH’s daughter will depend on her Modified Adjusted Gross Income (MAGI). Assuming she’s single, she can contribute up to a Roth IRA limit ($ 7,000 since she is over 50) if her MAGI is less than $ 129,000 in 2022. If her MAGI is greater at that but less than $ 144,000, she can still contribute, but the amount is reduced. (Use Worksheet 2-1 in IRS publication 590-A for how to calculate MAGI for Roth IRA purposes.)
When MAGI is $ 144,000 and above, no Roth IRA contribution is allowed. However, there is no comparable MAGI limit for traditional IRAs. That is, someone who cannot contribute to a Roth IRA because of the income limits can contribute to a traditional IRA. Additionally, there is no MAGI limit on who can switch from a Traditional IRA to a Roth IRA. If you decide to contribute to a Traditional IRA and convert to a Roth IRA, be sure to review your plan with your tax advisor before taking any action.
As for IRS resources, the Roth IRA chart for 2022 on IRS.gov covers the limits for other filing statuses, including couples. There are also details on how to calculate a reduced contribution amount to the Roth IRA if your MAGI is greater than allowed within the current limits.
401 (k) Limits
As I explained in a previous Forbes article, the 2022 401 (k) contribution limit is $ 20,500. The catch-up contribution is $ 6,500, bringing the total amount for people 50 and over to $ 27,000. There is no reduction in 401 (k) contribution limits depending on whether someone contributes to a Traditional or Roth IRA.
Other IRS Resources
The IRS has a Roth comparison chart that breaks down the differences between a Roth IRA, a Roth 401 (k) designated, and a pre-tax 401 (k). IRS Publication 590-A covers the contribution to an IRA.
An important reminder
Be sure to consult a tax advisor about the approach to take given your situation, as taxes are unique to each individual.
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