Can I Have a Roth IRA and a 401(k)?

You can hold both a Roth Individual Retirement Account (IRA) and a 401(k) simultaneously. These distinct retirement savings vehicles offer different structures and tax advantages, making them complementary components of a comprehensive retirement strategy. A Roth IRA is a personal retirement account funded with after-tax contributions, allowing for tax-free growth and qualified withdrawals in retirement. Conversely, a 401(k) is an employer-sponsored retirement plan, typically receiving pre-tax contributions and providing tax-deferred growth, often supplemented by employer contributions. Utilizing both accounts can enhance overall retirement savings and provide flexibility in managing future tax liabilities.

Characteristics of Roth IRAs

A Roth IRA is an individual retirement arrangement, established and owned by an individual. Contributions are made with after-tax funds. Qualified withdrawals, including both contributions and earnings, are entirely free of federal income tax, provided certain conditions are met. This tax-free nature of distributions can be particularly advantageous if one anticipates being in a higher tax bracket during retirement.

To contribute to a Roth IRA, an individual must have earned income, such as wages, salaries, or net earnings from self-employment. There are no age restrictions for contributions.

Roth IRAs offer investment flexibility, allowing account holders a wide array of choices like stocks, bonds, and mutual funds. This control enables individuals to tailor their portfolio to their risk tolerance and financial goals. A non-working spouse can also contribute to a Roth IRA through a spousal IRA, if the working spouse has sufficient earned income.

Characteristics of 401(k)s

A 401(k) is an employer-sponsored retirement savings plan. Traditional 401(k)s operate on a pre-tax basis, meaning contributions reduce current taxable income, and investments grow tax-deferred until withdrawal. Many employers provide contributions, such as matching funds or profit-sharing. Matching contributions involve the employer contributing a certain amount for each dollar the employee contributes, up to a specified percentage of salary. These employer contributions boost retirement savings and are often subject to a vesting schedule, which dictates when the employee gains full ownership.

Some 401(k) plans offer a Roth 401(k) option, allowing after-tax contributions. While Roth 401(k) contributions do not provide an upfront tax deduction, qualified withdrawals are tax-free. Investment options for both traditional and Roth 401(k)s are typically selected by the plan administrator from a predefined list, offering less flexibility than a Roth IRA.

Contribution Rules for Both Account Types

The IRS establishes annual contribution limits for Roth IRAs and 401(k) plans, which operate independently. This means an individual can contribute the maximum allowed to both accounts if they meet eligibility criteria. For 2025, employees can contribute up to $23,500 to their 401(k) plans, whether traditional or Roth. This limit applies to employee deferrals and excludes employer contributions. Individuals aged 50 and over can make an additional 401(k) catch-up contribution of $7,500, bringing their total employee deferral limit to $31,000.

For Roth IRAs, the 2025 annual contribution limit is $7,000. Individuals aged 50 and over can make an additional catch-up contribution of $1,000, increasing their total Roth IRA limit to $8,000.

Roth IRA contributions are subject to Modified Adjusted Gross Income (MAGI) limitations. For 2025, single filers and heads of household can make a full Roth IRA contribution if their MAGI is less than $150,000, phasing out at $165,000. For married couples filing jointly, the full contribution is allowed if their MAGI is less than $236,000, phasing out at $246,000.

Employer contributions to a 401(k), such as matching funds, are separate from an employee’s personal deferral limits. The total combined employee and employer contributions to a 401(k) cannot exceed $70,000 for those under age 50 in 2025, with higher limits for those eligible for catch-up contributions.

Withdrawal Rules for Both Account Types

For Roth IRAs, qualified withdrawals are tax-free and penalty-free. A distribution is qualified if it occurs after age 59½ and after a five-year holding period, which begins on January 1 of the tax year of the first contribution to any Roth IRA. Exceptions allow penalty-free withdrawals before age 59½ for reasons like a first-time home purchase (up to $10,000 lifetime limit), disability, or death. Roth IRA contributions can be withdrawn at any time, tax- and penalty-free, regardless of age or the five-year rule.

For 401(k) plans, distributions are typically penalty-free at age 59½. Traditional 401(k) withdrawals are subject to ordinary income tax.

Qualified Roth 401(k) withdrawals are tax-free. Early withdrawals from a 401(k) before age 59½ are typically subject to a 10% federal income tax penalty in addition to ordinary income taxes. Exceptions to this penalty include separation from service at age 55 or later, disability, certain unreimbursed medical expenses, or a qualified reservist distribution.

Required Minimum Distributions (RMDs) apply to traditional 401(k)s, generally beginning at age 73. Roth IRAs are not subject to RMDs for the original owner, offering flexibility for funds to continue growing tax-free.