If your employer offers a 401(k) plan, there may still be room in your retirement savings for a Roth IRA. Yes, you can contribute to both a 401(k) and a Roth IRA, but there are certain limitations you'll have to consider.
This article will go over how to determine your eligibility for a Roth IRA. You'll also learn how much you can contribute to that Roth IRA, how to work around the eligibility restrictions, the flexibility of saving in a Roth IRA versus other individual retirement accounts, and the benefits of saving in both a 401(k) and a Roth IRA.
Check your eligibility
The first step in determining your eligibility for contributing to a Roth IRA is to find your modified adjusted gross income. That means adding up your wages, interest earned (including qualified savings bonds), dividends, capital gains, and other income. While you'd normally subtract items such as student loan interest or tuition and fees, you won't for the purposes of determining your modified AGI for a Roth IRA. You can find a full breakdown of how to determine your modified AGI on the IRS’ website.
Once you've determined your modified adjusted gross income, you simply have to compare it to the following table to determine your eligibility.
| Tax Filing Status | Maximum Eligible Modified AGI (2024) | Maximum Eligible Modified AGI (2023) |
|---|---|---|
| Married, filing jointly or qualifying widow(er) | $240,000 | $228,000 |
| Single, head of household, or married filing separately, and you didn't live with your spouse at any time during the year | $161,000 | $153,000 |
| Married, filing separately, and you lived with your spouse at any time during the year | $10,000 | $10,000 |
Contribution limits for Roth IRAs
For most individuals, the Roth IRA contribution limit in 2024 is the smaller of $7,000 or your taxable income. In 2023, the limit was $6,500. If you're age 50 or older, you can make an additional $1,000 catch-up contribution in both years.
Some may see a reduced contribution limit based on their modified AGI. If you make within $10,000 or $15,000 of the maximum modified AGI, you'll have to do a little math.
- Take the maximum income limit for your filing status and subtract your modified AGI. For example, if your single and will earn $150,000 in 2024, you'd subtract your earnings from the $161,000 income limit: $161,000-$150,000 = $11,000
- If you're married, filing jointly or separately if you lived with your spouse, take that number and divide by $10,000.
- Otherwise divide by $15,000. Using our example, you'd divide $11,000 by $15,000: $11,000/$15,000 = 0.7333
- Multiply the resulting percentage by $7,000 (or $8,000 if 50 or older). That's your contribution limit for a Roth IRA. If you're younger than 50, using our example, your maximum contribution is: 0.7333*$7,000 = $5,133.33.
Importantly, the contribution limits apply to all IRAs. The income limits for the Roth IRA apply only to Roth IRA contributions, so you could still contribute to a traditional IRA up to the $6,500 (or $7,500) limit for 2023, and $7,000 (or $8,000) in 2024. Those contributions won't be tax-deductible, though, if your Roth contributions are limited by your income and you have a 401(k) at work.
How to get money into a Roth IRA even if you're not eligible to contribute
Savvy savers can still get money into a Roth IRA even if they're not eligible to contribute to one directly. They can utilize the backdoor Roth IRA strategy. This involves making a nondeductible contribution to a traditional IRA and converting those funds into a Roth IRA.
If you have other IRA accounts with pre-tax contributions in them, you'll have to mind the pro rata (or aggregation) rule. This makes the backdoor Roth strategy ineffective. You can get around the problem if your work 401(k) allows rollovers from an IRA. Roll over your pre-tax IRA funds into the 401(k) and then use the backdoor Roth conversion.
Saving for retirement in a Roth IRA
If you meet the income requirements for contributions, there are two compelling reasons to use a Roth IRA for retirement savings.
- Tax diversification: Your withdrawals of contributions and earnings after the age of 59 1/2 are tax-free as long as you've had the account open for five years or more. Your 401(k) and traditional IRA withdrawals, on the other hand, are taxable. Tax-free withdrawals from a Roth IRA are most appealing if you expect to be in a higher tax bracket in retirement. In that case, it's not a bad idea to diversify your retirement income with a tax-free source.
- Estate planning: Roth IRAs are not subject to required minimum distributions (RMDs). If you don't need the money for expenses, you can leave it in the account to bequeath to your loved ones.
Other reasons to use a Roth IRA
One of the biggest advantages of a Roth IRA over other retirement savings accounts is the ability to access contributions at any time. Thus a Roth IRA can be a good vehicle to save for preretirement goals if you otherwise wouldn't contribute to an IRA.
Assuming you're eligible for Roth IRA contributions, let's say you deposit $9,000 over three years. You invest those contributions in low-cost mutual funds, and your balance grows to about $13,000 in six years. At that point, you decide to buy a car. You can withdraw up to $9,000 from the account without explanation and without penalties. You can't touch the $4,000 in earnings unless you want to pay income taxes plus a 10% penalty.
There's also a way to access your Roth IRA earnings early without paying penalties or taxes. You can withdraw up to $10,000 in earnings (plus any amount of contributions) if you use the money for a home purchase. These are the requirements:
- It's been at least five years since your first Roth IRA contribution.
- You and your spouse haven't owned a primary home in the past two years.
- You use the funds within 120 days of withdrawal.
The $10,000 earnings withdrawal exception is a lifetime cap, so you can't repeat this move in the future.
If you use the backdoor Roth strategy, you can access conversions after five years. You can use conversions to gain access to your traditional pre-tax retirement accounts early without paying a penalty if you strategically convert funds five years before you'll need them. You'll still owe taxes on the funds at the time of conversion.
Related Retirement Topics
Benefits of having both a 401(k) and a Roth IRA
Using both a 401(k) and a Roth IRA to save can be a great option for someone looking to put as much money as possible into tax-advantaged retirement accounts.
If you're a higher-income earner on the edge of qualifying for a Roth IRA contribution, making a 401(k) contribution could push you under the income limitations since those contributions don't count toward your AGI. That would open the door for more flexibility with short-term savings in a Roth IRA.
Ultimately, an employer-sponsored 401(k) shouldn't prevent you from getting money into a Roth IRA. While you should consider any other options at your disposal, maximizing the amount of money in your tax-advantaged savings accounts is usually a good strategy for a healthy retirement.
