Can I Invest in a Roth IRA and 401(k)?

Contributing to both a Roth IRA and a 401(k) simultaneously for retirement savings is a wise financial strategy. These distinct retirement accounts offer different benefits and rules, which can complement each other effectively. Understanding the nature of each account and how their respective contribution rules and income limitations interact is important for maximizing retirement planning efforts.

Understanding Roth IRAs and 401(k)s

A Roth IRA is an individual retirement account that allows contributions made with after-tax dollars. The primary benefit of a Roth IRA is that qualified withdrawals in retirement are entirely tax-free. Generally, Roth IRAs do not have required minimum distributions (RMDs) for the original owner during their lifetime.

A 401(k) is an employer-sponsored retirement plan, which can be offered in both traditional and Roth versions. Traditional 401(k) contributions are typically made on a pre-tax basis, meaning they reduce current taxable income, with withdrawals taxed in retirement. Roth 401(k) contributions are made with after-tax dollars, and qualified withdrawals are tax-free. Many 401(k) plans also feature employer contributions, such as matching contributions or profit-sharing, which are separate from employee contributions and typically vest over time. Both traditional and Roth 401(k)s are subject to required minimum distributions in retirement.

Contribution Rules for Each Account

The Internal Revenue Service (IRS) sets separate contribution limits for Roth IRAs and 401(k)s. For 2025, the annual contribution limit for Roth IRAs is $7,000. Individuals aged 50 and older can make an additional catch-up contribution of $1,000, bringing their total Roth IRA contribution limit to $8,000. These limits apply to all IRAs combined (traditional and Roth) for a single individual.

For 401(k) plans, the employee elective deferral limit for 2025 is $23,500. This limit applies to both traditional and Roth 401(k) contributions. For employees aged 50 and older, a catch-up contribution of $7,500 is permitted, increasing their total elective deferral limit to $31,000. A higher catch-up contribution of $11,250 applies for those aged 60 to 63, allowing them to contribute up to $34,750. Employer contributions to a 401(k) plan do not count against an employee’s personal elective deferral limit.

Income-Based Eligibility for Contributions

Income levels can significantly influence an individual’s ability to contribute directly to a Roth IRA. For 2025, single filers can make a full Roth IRA contribution if their modified adjusted gross income (MAGI) is less than $150,000. Partial contributions are allowed for single filers with MAGI between $150,000 and $165,000. For married couples filing jointly, a full contribution is possible if their MAGI is less than $236,000, with a phase-out range between $236,000 and $246,000.

When income exceeds these thresholds, individuals may consider a “backdoor Roth IRA” strategy. This involves making a non-deductible contribution to a traditional IRA and then converting those funds to a Roth IRA. There are generally no income limitations for employee contributions to a 401(k) plan, regardless of the employee’s income.

Combining Accounts for Retirement Savings

Utilizing both a Roth IRA and a 401(k) can be a strategic approach to retirement planning, offering benefits like tax diversification and increased savings capacity. Funds in a traditional 401(k) are taxed upon withdrawal, while qualified distributions from a Roth IRA or Roth 401(k) are tax-free. This blend of pre-tax and after-tax savings provides flexibility in managing future tax liabilities during retirement.

By contributing to both a 401(k) and a Roth IRA, individuals can save more than the limit for a single account, accelerating their overall retirement savings. For instance, in 2025, an individual under age 50 could contribute $23,500 to a 401(k) and an additional $7,000 to a Roth IRA, totaling $30,500. This approach maximizes the amount set aside for retirement, which can be important for long-term financial security. Having different types of accounts also provides more flexibility in managing withdrawals during retirement, allowing individuals to choose which accounts to draw from based on their tax situation at that time.