How to Use a Roth IRA and Roth 401(k) at the Same Time

Dear Dr. Don,

I participate in a Roth 401(k) at work with employer matching contributions. I also have a Roth individual retirement account through a financial company. If I contribute $5,500 to my work's 401(k), may I also save $5,500 in my personal Roth IRA, or would I be limited to $5,500 in total contributions between the two?

As I understand it, I can contribute up to $17,500 to my 401(k) per year and $5,500 to my personal Roth IRA.

Thanks, -- Matt Morass

Dear Matt,

Having a Roth 401(k) plan at work doesn't limit your ability to contribute to your personal Roth IRA. Depending on your income, however, you may have to fund a traditional IRA and then do a Roth IRA conversion.

You can always contribute to a traditional IRA up to the annual contribution limits as long as you have sufficient compensation or salary. There are income limits dictating whether you can contribute to a Roth IRA. The limits depend on your filing status and your modified adjusted gross income, or MAGI. If you can't contribute directly to a Roth IRA, then you can contribute to a traditional IRA and then perform a Roth IRA conversion.

Since your employer has a retirement plan in place, there may also be limits on making tax-deductible contributions to a traditional IRA. This depends on your filing status and MAGI.

At a minimum, I like to see people contribute to their retirement plan at work up to the limit of the company's matching program, if there is one. With a Roth 401(k) plan, your contributions are made with after-tax dollars. But the qualified distributions are tax-free, which can be nice when you are retired. The company-matching contributions go into a separate pretax account. Of course, traditional 401(k) accounts are taxable when payments are distributed out of the plan.

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